5 Things You Should Know About Investment

investment

In this article, I have listed 5 things you should know about investment. This will help you to evaluate and compare various investment instruments are available in the market.

Return on Investment

A good rate of return on an investment is the first and foremost condition for effective investment. The rate of return is the ratio of a sum of annual income and price appreciation to purchase price of the asset or investment.

The rate of Return = Annual income + (Ending price – Beginning price)/ Beginning price.

Illustration

Suppose a person has invested in equity share of a company X at the price of ₹ 100.00. During the year, company X pays a dividend to its shareholders of ₹ 10.00 and price of the share at the end of the year is ₹ 115.00.

Rate of Return = 10+ (115-100)/100 =0.25 or 25%

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Risk

The degree of risk varies across investment types, all investments bear the risk. So it is important to determine how much risk is involved in an investment. The average performance of an investment normally provides a good indicator. Past performance is merely a guide to future performance, not a guarantee. Investors should consider whether they could manage the safety risk associated with investments financially and psychologically.

Liquidity

Liquidity means marketability of an investment. An investment instrument is considered to be highly marketable when:

  • It can transact quickly.
  • The transaction cost is low.
  • The price change between 2 transactions is negligible.

Equity shares of large, well-established companies can be easily liquidated in the stock market. While shares of small and unknown companies have low liquidity.

To determine the liquidity of other financial instruments like provident fund (a noun – marketable instrument). We would consider other factors like, can we make a substantial withdrawal without much penalty, or can we take a loan against the accumulated balance at an interest rate not much higher than our earning rate of interest on the provident fund account.

Tax Benefits

Some of our investments would provide us with tax benefits while other would not. This would also be kept in mind when choosing the asset. Tax benefit is mainly of 3 types

Initial Tax Benefits – This is the tax gain at the time of making the investments, like Equity Linked Savings Scheme.

Continuing Tax Benefit – This is the tax benefit gained in the period return from the asset, such as dividends.

Terminal Tax Benefit – This is the tax relief the investor gains when he liquidates the investments. For example, a withdrawal from provident fund account is not taxable.

Convenience 

Convenience means ease of investment. The degree of convenience would vary from one asset to other. For example, it is easy to invest in equity shares compared to real estate because real estate involves a lot of documentation and legal requirements.

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