Objectives of Investment

An investor has various alternative avenues of investment for his savings to flow to. Savings kept as cash are barren and do not earn anything. Hence, savings are invested in assets depending on their risk and return characteristics. The objectives of the investor are minimizing the risk involved in investment and maximize the return from the investment.

Our savings kept as cash are not only barren because they do not earn anything, but also loses its value to the extent of rise in prices. Thus, rise in prices or inflation erodes the value of money. Savings are invested to provide a hedge or protection against inflation. If the investment cannot earn as much as the rise in prices, the real rate of return would be negative. Thus, if inflation is at an average annual rate of ten percent, then the return from an investment should be above ten percent to induce savings to flow into investment.

Thus, the objectives of an investor can be stated as:

Maximisation of return.

Minimization of risk

Hedge against inflation.

Investors, in general, desire to earn as large returns as possible with the minimum of risk. Risk here may be understood as the probability that actual returns realized from an investment may be different from the expected return. If we consider the financial assets available for investment, we can classify them into different risk categories. Government securities would constitute the low risk category as they are practically risk free. Debentures and preference shares of companies may be classified as medium risk assets. Equity shares of companies would form the high risk category of financial assets. An investor would be prepared to assume higher risk only if he expects to get proportionately higher returns. There is a trade-off between risk and return. The expected return of an investment is directly proportional to its risk. Thus, in the financial market, there are different financial assets with varying risk-return combinations.