Factors Affecting Investment Decisions

Factors Affecting Investment Decisions

Investment choices vary from investor to investor depending on their goals, risk tolerance and individual personality. But, there are certain common factors that affect everyone’s investment decisions.

Whether you make investment decisions on your own or rely on professional help, knowing the factors that affect your investment decision is essential to maximize your portfolio return.

Factors affecting investment decisions are:

▪ Net worth

Your family’s wealth or net worth plays a major role in investment decision-making. For example, two friends with similar salaries can have completely different family background and thus completely different investment patterns. Someone from a wealthy family would easily be able to take exposure in equity without having the fear of losing a part of the portfolio while another person with limited means might be more conservative in nature.

Tip: So, your family’s net worth needs to be considered while taking investment decisions.

▪ Risk appetite

If you are one of those who lose their sleep if the investment portfolio goes below your invested amount even for a day, then equity is not your forte. Your willingness to take risk affects your investment choices. For example, if you are comfortable with daily volatility of the market, you can consider to build an aggressive portfolio.

Tip: You can slowly start equity investments with MIPs, balanced funds, etc. before plunging into equity-oriented options like equity mutual funds, stocks and unit-linked insurance plans (ULIPs).

▪ Time horizon

A longer time horizon allows you the opportunity to invest in relatively riskier options like stock. That’s because the volatility of stocks usually flatten over time. However, if you have a shorter time span, investments with stability and guaranteed return are the probable choices for you.

Tip: The earlier you start, the better it is since the power of compounding helps in building your investment portfolio.

▪ Investment need

Once the financial goals are known, the primary reason for investment is evident. That helps in making investment decisions easily. This is because the amount of money needed for the specific goal and timelines would be specified, making it easier to plan.

Tip: Your needs have to be separated from wants. Once the investment need is known and penned, it becomes easier to plan and stick to it as well.

▪ Return expectations

Depending on your return expectation, you can choose the right investment avenue to meet your desired goal. Each investment has its associated risk and expected return and being an investor, you would know that there is a trade-off between risk and return, i.e. higher the expected return, higher would be the associated risk.

Tip: However, opting for high-risk investments might not be most desirable in your investment journey as the converse is not always true. So, investment is a game of choosing your risk and then achieving the return on investment and not the other way round!

▪ Investor knowledge and experience

An experienced investor usually takes faster and smoother investment decisions without too much time. Thus, an Investor’s experience plays a role in decision making. It’s also good to seek help of expert advisers to smart decisions.

Tip: It takes time for investors to gain investment experience which cannot be expedited under any circumstance. So, start slow, enjoy the investment experience before taking any drastic step!


There are lot more factors that goes into making investment decisions and it depends on your personal profile, family history, number of dependants, loans, etc. Considering the various factors while making investment decisions can help you build a solid investment portfolio that best suits your needs and temperament.


Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


What is debt?

Every company needs funds to grow its business. It can raise these through two kinds of instruments – equity and debt. What is debt?Debt instruments are issued by companies and the government to borrow funds from investors. In addition to financing growth initiatives, issuers use these funds to meet unexpected cash requirements or generally bridge the gap between income and expenses. Debt is generally raised for a very specific purpose that is mentioned in the term of agreement, called the bond covenant. There are several types of debt instruments. They are classified into short-term and long-term based on their maturity.- Short-term debt instrumentsShort-term or money market instruments have a maturity of up to one year. They include Treasury Bills (T-bills), Commercial Papers (CPs), Certificate of Deposits (CDs), Repurchase Agreements (Repo), and Banker's Acceptance.T-bills and CPs are among the most common money market instruments. T-bills are issued by the central government for maturities of three-month, six-month, and one-year. CPs are issued by companies and have a maturity ranging from one to 270 days. - Return on Zero-coupon bondsT-bills and CPs are called Zero-coupon instruments because neither pays periodic interest (called coupon). Instead, they are issued at a discount and redeemed at par. For example, a company may issue CPs worth Rs.100 each (called par value) at Rs.96 (i.e. at a discount of Rs.4). If you invest in it, you will receive Rs.100 each on maturity. The difference of Rs.4 is your return.- Long-term debt instrumentsThis includes bonds issued by companies and the government for a term of above one year. They generally pay a periodic coupon and return your original investment at the end of the term. The coupon rate can be fixed (such as 6%, 8%, 11%...) or floating. The coupon for a floating rate bond depends on another rate and is calculated using a fixed formula every time. For example, a floating-rate bond linked to inflation is called an inflation-linked bond. Its coupon is calculated using an inflation-based formula like [inflation rate + x%]. Why companies raise debt?You must be wondering why companies raise debt when they can raise money through equity. Simple: equity and debt are different products with unique characteristics. The sum of funds raised through these is called the company’s capital. The objective is to weigh the features of these products and decide the company’s ideal capital mix or, formally, capital structure.Debt is a cheaper source of funds than equity because the coupon rate is always lower than what the company pays equity holders. However, unlike equity dividends, the company is legally bound to pay the coupon in every period. Equity dividends can be increased, decreased or even cancelled at the company’s will.Also, promoters have to part with their shares whenever a company raises equity. This reduces their say in the business and they are not always willing to do this.Risks of investing in bondsBonds are considered low-risk investments because they pay a regular coupon and give investors a legal claim on the company’s assets in case their dues are not paid. Although safer than stocks and other instruments, bonds are not completely risk-free. The ability and willingness of the borrower to pay you are the greatest sources of risk for bond investors.Increasing interest rates is another major source of risk because bonds trade on the exchange like stocks. When interest rates increase, new bonds with the same features pay a higher coupon. This reduces their value on the exchange. Let’s look at an example.Suppose you own a bond that pays 9% coupon. When interest rates go up, new bonds with the same characteristics will pay a higher coupon, say 10%. Investors that are holding the same bond as you will sell it and invest in the new bonds. But they can only sell at a lower price because other investors would rather buy the new higher-paying bond for the same price. So, your bond’s price will fall, resulting in a loss. Risk premiumThe government is the safest borrower because it is the most likely to meet its bond obligations. This is why government bonds are called risk-free bonds. All other bonds are considered riskier. However, to compensate investors for the risk they take by investing in their bonds, other bond issuers pay a higher coupon than government bonds. This extra coupon is called the risk premium.To sum upEquity and debt are just as important to your portfolio as to a company’s capital structure. Equity maximizes returns and debt minimizes risk. Your investment strategy should be to optimally allocate funds to debt and equity based on your investment objectives.If returns are more important to you, invest more in equity. But be prepared to incur losses along the way. If security is more important to you, invest more in debt. But don’t expect supernormal returns.       Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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All about Equity

What is equity fund?Equity or shares are instruments companies issue to raise funds for their growth. Investors buy these kinds of equity investment such as shares because they expect the value of these shares to increase as the company grows with the help of their funds.Equity shares give you ownership rights in the company. In other words, if you buy a company’s shares, you become one of its owners. However, your ownership interest is extremely small because you own a very small percentage of shares. Nonetheless, your shares give you the right to vote in all important matters of the company. They also entitle you to a share in the company’s profits. How to buy shares?There are two markets where you can buy shares – primary and secondary. The Primary market comprises all transactions in which the company directly (i.e. through an agent) offers its shares to general investors. The first time a company does so is called its initial public offer (IPO). All subsequent offers are called follow-on public offers (FPOs). You can bid for IPO and FPO shares through your demat account.A company’s shares get listed on a stock exchange soon after its IPO. From here on, you can buy and sell them on the stock market. All buy and sell transactions on the stock market are called secondary market transactions. Exchanges act as an intermediary between the buyer and the seller for these transactions. Equity mutual fundsActive stock trading is a skilled full-time job. If you don’t have the time to master it, invest in top equity mutual funds and let the experts do it for you. There are many good fund houses that have plans for every investment objective. They are managed by highly trained investment professionals with years of stock picking experience. Types of equity returnsShares generate returns in two ways – price returns and dividends. Price return is the profit you make when your stock’s price increases. Share prices increase when a company performs well. So, when buying shares, you are essentially betting on the company’s performance.As discussed earlier, shares give you ownership rights in the business and entitle you to a share in its profits. Companies retain most of their profits and spend them on future growth. But they also distribute a part of them to shareholders. This is known as dividend. Dividends are typically announced on a per share bases. So, if you have 100 shares of a company that has announced a dividend of Rs.5 per share, your total dividend will be Rs.500.It is not compulsory for companies to pay a dividend. They can pay a different amount each year or not pay anything at all. Analysing equity returnsPrice appreciation and dividend returns vary from company to company. For a better analysis, you should look at their sum, i.e. total return. Young companies generally don’t pay high dividends because they need to invest in growth. However, they generate great price returns because of their strong growth potential. Mature companies generate moderate price returns because they have limited investment opportunities. However, they can pay higher dividends because they are cash rich. Equity riskEquity investments are highly susceptible to market developments. Also, they don’t guarantee a fixed return like bonds. This makes them high-risk investments.A proportion of this risk is stock-specific or unsystematic. For example, internal labor issues will only affect the shares of the company that is facing them. You can easily mitigate this risk by investing in other companies. Other risks affect most companies and are hard to mitigate. For example, if a country is at war, stocks of most companies in it will be affected. You cannot mitigate this risk by investing in other stocks. Such risks are called systematic or non-diversifiable risks. Don’t let systematic risks bother you because you cannot do much about them. Try to reduce your unsystematic risk as far as possible by building a portfolio that has shares of several companies from different sectors.   In ConclusionNow that you have a firm grip on the basics of investment in equities, you are all set to start trading. Remember, stock trading is risky, but risk and return go hand in hand. So, pick your stocks wisely and leverage the expertise of professional investors by including equity mutual funds in your portfolio.Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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  • Tax Saving FD – Know About Tax Saving Fixed Deposit

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