According to his inclinations, the investor has access to a number of alternative investment channels for his savings. The flow of savings into investments yields a return, whereas savings held as currency generate no return. The investment of savings in assets based on their risk and return characteristics.
Any sane investor is aware that money is losing purchasing power as a result of price inflation. If the return on investment is less than the increase in prices or inflation, the real rate of return is negative. Thus, if the average annual rate of inflation is 5%, the rate of return must be 5% or greater to encourage savings to be invested.
When investing in short-term bank deposits or government securities, the rate of return is approximately 5 to 7 percent. As the risk of monetary loss is negligible in such circumstances, the rate can be described as risk-free.
However, every investment entails some degree of risk or uncertainty. Through effective strategic management, an investor aims to mitigate investment risk while maximizing return.
Key Characteristics of Investment Program
An investment program is a strategic component of business management that seeks to increase wealth via wise asset allocation. Diversification, risk management, and liquidity are three crucial components of this type of program that guarantee money is allocated among several investment options to minimize risks and optimize returns.
A well-designed program considers financial planning, company objectives, and revenue projections in addition to time horizons. Any company that wants to accomplish both long-term financial success and excellent resource management must comprehend these components.
Appropriate diversification
Appropriate diversification entails a variety of investment commitments made in various methods, crucial for effective financial planning. Those unfamiliar with the aggressive-defensive approach nevertheless frequently employ the inflation-deflation hedging theory.
Because local or regional droughts, storms, floods, etc. can cause extensive property damage, geographical diversification may be considered whenever conceivable.
Vertical and horizontal diversification options are also available. Vertical diversification occurs when a portfolio contains securities of various companies engaged in different phases of production, from raw materials to finished products. Horizontal diversification, on the other hand, refers to an investor’s ownership of multiple companies operating in the secure stage of production.
Protection of Principal
The safety sought in an investment is not absolute or complete; rather, it entails protection against loss under conditions and variations that are reasonably probable.
It necessitates a thorough examination of economic and industry trends prior to deciding the nature and/or timing of investments. Thus, It acknowledges that errors are inevitable and suggests extensive diversification as a remedy.
Classifying Investments
Classifying securities according to bonds and shares and then reclassifying them according to categories of bonds and types of shares is another method for diversifying security holdings.
Again, they can be categorized according to the issuers, the dates of dividend or interest payments, and the products produced by the company represented by the securities. However, excessive diversification is undesirable.
By limiting investments to a few issues, the investor has an excellent opportunity to maintain a thorough understanding of each issue’s circumstances. The simplest and most effective method of diversification is holding multiple media with a reasonable amount of concentration in each.
Adequate Liquidity and Collateral Value
A financial asset is liquid if it can be converted into cash immediately at its full market value and in any quantity. To be liquid, an investment must be reversible or marketable.
The distinction between reversibility and marketability is that reversibility refers to the process of reversing or terminating a transaction, whereas marketability involves selling an investment on the market for cash. Every investor must have a solid portfolio to ensure the availability of additional funds for business opportunities in the event of an emergency.
Whether capital is to be raised through sale or borrowing, it will be simpler if the portfolio contains a predetermined proportion of high-quality and easily saleable investments.
Stability of Cash Flow
The stability of income must be evaluated in a variety of ways, just as the security of principal must be evaluated in various ways. An investor must consider the stability of both monetary and purchasing power income.
However, the emphasis on income and stability may not always align with other investment principles. If emphasis is placed on monetary income stability, capital growth and diversification will be constrained.
Capital Increase
Today, capital appreciation is an essential principle. Investors and their advisors are always pursuing “growth stocks” because they recognize the correlation between company and industry expansion and substantial capital appreciation. It is extremely difficult to make the right decision. The ideal “growth stock” is the ideal issue in the ideal industry purchased at the ideal time.
Tax Benefits
It may be costly for an investor to plan an investment program without considering their tax status. There are actually two issues at play here, one pertaining to the quantity of income generated by the investment and the other to the taxation of that income.
When an investor’s income is low, he or she desires the highest possible financial returns and is more likely to take excessive risk. Conversely, investors who are not pressed for cash income frequently find that income taxes deplete certain categories of investment income less than others, thereby influencing their investment decisions.
Stable Purchasing Power
The purchasing power of the future funds should be considered by the investor, as investments almost always entail the commitment of current funds with the expectation of receiving larger amounts of future funds.
For the purpose of maintaining purchasing power stability, investors should examine the degree of price level inflation they anticipate, the potential for profit and loss in the available investments, and the constraints imposed by personal and family considerations.
Disguisability
To be secure from social disorder, government confiscation, or unjustifiable levels of taxation, property must be concealable and leave no trace of the income it generates. Gold and precious stones have long been valued for these applications due to their high value, compact size, and transferability.
Conclusion
Finally, because they provide the best possible asset allocation, risk mitigation, and liquidity, the fundamental elements of an investment program are critical to effective business management. Investing in a carefully considered strategy that complements business goals can reduce risk and increase rewards.
A long-term outlook, diversity, and flexibility are critical in the face of market and economic upheavals. Businesses can attain long-term growth and meet their financial goals by carefully balancing these factors, which emphasizes the need of strategic and well-coordinated investment planning in modern corporate management.
