Factors affecting Investment Decision for Individuals

 The Investment decision relates to decision made by Investor’s with respect to the amount of funds to be deployed in the investment opportunities. However, there are certain aspects that influence the decision of the investor’s which are discussed below in detail:

1.    Security

This starts with the safety of the capital invested. Investor is always keen on getting higher returns which in turn is related to ability of taking risks. There is a famous saying that “Higher the risk, higher the return” that is applicable to most of the investment avenues however one should always know that “Lower the risk, Higher are the chances of capital being secured “. Hence in order to understand the safety of investment, one need to understand the level of risks involved. 

2.    Liquidity

Liquidity means how easily and quickly one can liquidate the investments. The degree of ease could be different across different categories. Certain investment options come with some operational features like Lock-in-Period, early exit penalty, divisibility deterrent etc. Such features not only hamper the liquidity but also lowers the investment returns. 

3.       Returns

The primary purpose of any investment is to earn some returns whether in form regular or periodic returns, capital appreciation or capital gains. It is the performance measure used to evaluate the efficiency and profitability of Investments. The current income is received regularly without disposing off the investment whereas capital gains can be obtained after selling the investments.

4.       Taxation

What is left after the deduction of taxes is what matters the most. Some returns may come with lower tax while some with high taxation. It all depends upon the asset/product in which such investment is made. Hence, taxation perspective shall not be looked in isolation rather other critical factors shall be evaluated to give a holistic approach to investment decision. 

Further some investment in products offer tax deduction while computing the income for the purposes of income tax return. Such deductions effectively increase the return on investment, since the same is calculated after considering the net amount invested. However, one must realise that there is always the trade-off between liquidity and tax deduction.

 

The above discussion offers good background for evaluation of investment products.

Location: Pitam Pura, New Delhi, Delhi, India

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