What Should be Our Investment Objectives!

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All personal investing is designed to achieve a goal, which may be tangible (a car, a house) or intangible (security, social status). Therefore, goals should be classified into various types based on the way investors approach them.

Near- Term High Priority Goals: These are goals, which have a high emotional priority to the investor, and he wishes to achieve these goals within a few years at the most. For example: a new house. As a result; investment vehicles for these goals tend to be either in the forms equivalent to “cash or as fixed-income ‘instruments with maturity dates in correspondence with the goal dates. Because of the high emotional, importance these goals have, investor, especially the one with moderate means will not go for any other form of investment which involves more risk especially where, his goal is just in sight.

Long-Term High Priority Goals: For most people, this goal is an indication of: their need for financial independence at a point some, years ahead in the future. Eg: Financial indepen­dence at the time of retirement or starting a fund for the higher education of a three-year old child. Normally, we find that either because of personal preference or because the discounted present value is larger in relation to their resources, the time of realization for such goals is set around 60 years of age for people of moderate means. Because of the long-term nature of such goals, there is not a tendency o adopt more aggressive investment approaches except perhaps, in the last 5 to 10 years before retirement. Even then, investors usually prefer a diversified approach using different classes of assets.

Low Priority Goals: These goals are much lower down in the scale of priority and are not particularly painful achieved. For people with moderate to substantial wealth, these could range from a world tour to donating funds for charity. As a result investors often invest in speculative kinds of investment either for the fun of it or just to tryout some particular aspect of the investment process.

Entrepreneurial or Money Making goals: These goals pertain to individuals who want to maximize wealth and who are not satisfied by the conventional saving and investing approach. These investors usually put all the spare money they have into stocks preferably of the company in which they are working/owing and leave it there until it reaches some level which either the individual believes is enough or is scared of loosing what has been built-up over the years.. Even then the process of diversification and building up a conventional portfolio usually takes him a long time involving a series of opportunities and sales spread over many years.

 

Does the Investment Suffer from any Constraints!

An investor-seeking fulfillment of the above mentioned goals operate under certain constraints:

  • • Liquidity
  • • Age
  • • Need for regular income
  • • Risk Tolerance
  • • Tax liability The change in investment management, therefore, lies in choosing the appropriate investments and designing a unit that will meet the investment objectives of the investor subject to his constraints. To take on this challenge, the first step will be to get acquaintained with the different types of investment alternatives available to the investors in our financial market.

Lets now understand the classification of various investment alternatives.

Type 1 investments have the lowest investment risk but the highest purchasing power risk. These include insured savings accounts, post office certificates of deposit, FE and HH savings bonds, treasury securities, and government agency securities.

 

Bank Fixed Deposits

When you deposit a certain sum in a bank with a fixed rate of interest and a specified time period, it is called a bank Fixed Deposit (FD). At maturity, you are entitled to receive the principal amount as well as the interest earned at the pre-specified rate during that period. The rate of interest for Bank Fixed Deposits varies between 4 and 6 per cent, depending on the maturity period of the FD and the amount invested. The interest can be calculated monthly, quarterly, half-yearly, or annually, and varies from bank to bank. They are one the most common savings avenue, and account for a substantial portion of an average investor’s savings. The facilities vary from bank to bank. Some services offered are withdrawal through cheques on maturity, break deposit through premature withdrawal, and overdraft facility etc.  

While a Bank FD does provide for an increase in your initial investment, it may be at a lower rate than other comparable fixed-return instruments. Since capital appreciation in any investment option depends on the safety of that option, and banks being among the safest avenues, the increase in invest­ment is modest.

Are Fixed Deposits Suitable For Regular Income?

A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Since the lump-sum amount depends on the rate of interest, currently between 4 and 6 per cent, Bank FDs are not suitable for regular income.

To What Extent Does a Bank FD Protect Me Against Inflation?

With a fixed return, which is lower than other assured return options, banks cannot guard against inflation. In fact, this is the main problem with Bank FDs as any return has to be calculated keeping inflation in mind.

Can I Borrow Against Bank FDs?

Yes, in some cases, loans upto 90 per cent of the deposit amount can be taken from the bank against fixed deposit receipts.

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