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Factors Which Affect Investors Investment Decision?

By News Canvass | Nov 15, 2021

Investing has always been a fascinating topic. It provides investors with the opportunity to build money and broaden their financial horizons. Individual and institutional investors have various investment goals. The following are key factors that are universal to all investors but will vary each investor:

● Required return
● Risk tolerance
● Time horizon

Investors may also have specialized requirements in terms of liquidity, tax concerns, legal requirements, religious or ethical standards compliance, or other special conditions. Because investors’ situations and needs change over time, it’s critical to re-evaluate their requirements on an annual basis.

1. Required Return

The amount of return required to achieve an investor’s objectives varies. The required rate of return before and after taxes can be determined based on a future wealth or portfolio value target.
An investor can pursue a total-return approach, in which no distinction is made between income (such as dividends and interest) and capital gains (that is, increases in market value). A total-return investor is unconcerned with the source of return changes in value or income. Alternatively, an investor can make a distinction between income and capital gains, pursuing income for immediate needs and capital gains for long-term goals. The return criterion should be defined in real terms, which involves correcting for inflation,
especially for a long-term horizon. This change is critical because it keeps the focus on what the collected portfolio will deliver at the conclusion of the time horizon. A client’s spending capacity is not improved by a rise in value that simply equals inflation.
Within the limits, the investment manager or adviser must be confident that the investor’s targeted rate of return is possible. The majority of clients desire high returns with low risk, yet few assets meet these criteria. The adviser or manager has a function to play in the client’s counselling.
Larger levels of expected return typically necessitate a higher level of risk. Some investors will prefer to invest in high-risk assets because they need high returns to accomplish their objectives, but the potential implications (downside risks) of this strategy must be considered. Other investors will have amassed adequate assets and will not require huge returns, allowing them to take a lower-risk approach with greater
assurance of fulfilling their objectives. This could be the case for a pension plan with a high funding level, which means that its assets are adequate (or nearly sufficient) to cover its liabilities.

2. Risk Tolerance

The amount of risk that investors are willing and able to bear with their investments is usually limited. There is a relationship between risk and return, as previously stated. In general, the bigger the predicted return, the higher the risk. Similarly, the larger the risk, the higher the predicted return. Risk tolerance is determined by an investor’s ability and willingness to take risks.
The ability to take risk is determined by the investor’s condition, such as the asset-to liability ratio and the time horizon. If an investor’s assets outnumber their liabilities, any losses incurred as a result of risk-taking may not have a significant impact on their way of life. Investors with a long-time horizon have more flexibility in adjusting their circumstances to cope with losses by saving more or waiting for markets to rebound, albeit recovery and timing cannot be assured. Willingness to take risks is also influenced by the investor’s psychology, which can be examined by surveys.
Regulatory constraints on the amount of risk that institutional investors, such as insurance firms and other financial intermediaries, can take with their portfolios may also apply. In some cases, an investor’s willingness to take risk and his or her ability to take risk may be incompatible. In such cases, the investment adviser should advise the investor on risk and establish the right level of risk to take in the portfolio, taking into account the investor’s ability and desire to take risks. The risk level assumed should be
the lower of the two risk levels.

3. Time Frame

The investor and adviser must agree on the investment’s time horizon. Some investors will require immediate access to funds from their holdings, while others will have a much longer time horizon.
A property and casualty insurance firm with claims due in the next few years, for example, will have a short time horizon, whereas a sovereign wealth fund investing oil profits for future generations will have a long-time horizon, maybe decades.
The investment horizon has a significant impact on the amount of risk that can be accepted with a portfolio and the amount of liquidity that may be necessary. The ease with which an investment can be converted into cash is known as liquidity.
Because they have more time to adapt to their circumstances, investors with longer time horizons should be able to assume greater risk. Markets rise more often than they fall over time, so an investor with a longer time horizon has a better chance of accumulating positive returns. Long-term investors are also better able to wait for markets to rebound after a period of bad performance, but this is not always possible.

4. Liquidity

The amount to which investors may need to withdraw money from their holdings varies. They may require a withdrawal to pay for a specific item or to establish a monthly revenue stream. These requirements have an impact on the types of investments made. When liquidity is necessary, the investments must be able to be converted to cash promptly and at a reasonable cost (low transaction fees and price changes).
A person may also demand that a portion of their portfolio remain liquid in order to cover unanticipated needs. Furthermore, the individual may have anticipated future liquidity demands, such as a planned future spending on children’s schooling or retirement income requirements. The liquidity restriction for an institution usually represents the institution’s liabilities.

5. Regulatory Issues

Regulatory regulations apply to certain sorts of investors’ portfolios. For example, in some countries and for some types of institutional investors, the percentage of a portfolio that can be invested overseas or in riskier assets like equities is limited. Insurance company holdings are usually subject to stringent regulations.

6. Taxes

Investors have different tax situations. Some investors pay taxes on their investment profits, while others do not. Pension funds, for example, are tax-free on investment returns in many nations. Furthermore, how income and capital gains are taxed can differ. It is critical to evaluate an investor’s tax condition as well as the tax implications of various assets. Investors should be concerned with the returns they receive after taxes and fees since that is the amount of money they have available to spend. Individuals may potentially face varied tax situations depending on the components of their wealth.
For example, if income and capital gains on assets maintained in a pension account are tax-free or tax-deferred, an individual may choose to keep some assets in a pension account.

If capital gains are taxed at a lower rate than income, the investor may opt to hold assets that are projected to yield capital gains in a taxable investment account. The location (holding) of assets can have a big impact on an investor’s after-tax profits and wealth building.

7. Unusual Situations

Many investors have specific needs or constraints that aren’t covered by the typical categories outlined thus far. Some investors have social, religious, or ethical views that limit the kind of investments they can make with their money. Investors may, for example, choose not to invest in companies that participate in activities that they fear may harm the environment. Other investors could insist on assets that are in line with their religious values.
Investors may also have special needs based on the type of their overall investment portfolio or financial situation. An employee of a company, for example, may seek to limit his or her investment in that company in order to reduce single-company exposure and acquire greater diversification.

Surprisingly, many people are willing to increase their stakes in their employers’ stock because of loyalty or familiarity, despite the danger that this technique carries. If the company collapses or its financial status deteriorates, such a plan can have serious ramifications. Institutional investors may also have unique and specific requirements as a result of their objectives and circumstances.

Apart from the aforementioned one, several other factors often guide or affect investment. Family history, personal profile, financial obligations, and other factors all have an impact on your investment decisions. Although the aforementioned elements influence decisions, it is still up to the investor to design a sound investment portfolio based on his or her needs and profile. It is recommended that you devise a strategy that will assist you in structuring and balancing your portfolio while also providing you with the best opportunity for profit.

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