What affects Investment Returns

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There are five key factors that determine the general rate of return you can expect on your investments:

1) Your investment objective
2) Your age and financial responsibilities
3) Your liquidity (availability of funds)
4) Your risk-bearing capacity
5) Your investment timeline

First, you should have a clear objective before investing your money. The objective could be for the ultimate goal of a property purchase, children's education and marriage, retirement planning and so on. It could also be a near-term objective of saving for a foreign trip, or buying a bike. Once you have an idea of that objective, then some of the other factors will fall into place in guiding your investment decisions. Second, your age and financial responsibility play a vital role in any investment decisions. By and large, investment at a young age is beneficial to your long-term financial health as youngsters usually have fewer financial responsibilities such as spouses, children or retired parents under their care. Furthermore, it's never a bad idea to start building your financial knowledge earlier on in life, but it's no sin if you didn't —even if you are further along in life, organising your financial future can still pay off handsomely over the years to come. Third, your availability of funds is an important consideration. If you have debts to pay off (e.g., a car or home loan), you may face obstacles in making regular investments. There's no problem at all with that; you don't want to be in the position of having a debt payment you can't meet because you put money in the stock market hoping for a quick gain but the market dropped. When making investments, you need to determine how soon you will need the money, and if you have available cash lying idle, it pays to think about how best to deploy that.

With that in mind, one of the most critical factors next affecting investment decisions is your risk-taking ability. An individual's risk-bearing capacity should be higher at a younger age— younger investors can take advantage of the power of compounding over the long-term and can withstand the swings of the market due to recessions or global crises. However, even at a younger age, if you determine that you'll need your funds very soon, it's generally not advisable to put money in the stock market. So the old investment advice of 'higher risk, higher return' is something that all investors should heed before they invest—in your younger years, you can accept more volatility by way of the stock market with the prospect of higher long-term rewards.

All of this flows into the final point, namely, that the timeline of your investment is the fifth important factor in determining your investment return goals. If you think you will need funds very soon, it's extremely risky to put those funds in the stock market, as markets can swing heavily in either direction on virtually any news, whether or not it is relevant to the stocks in which you're invested. Now in India, fixed deposits, gold and real estate are generally the most preferred investment options. However, if your timeline is such that you can think three plus years ahead (ideally five or more), equity investments have the potential to generate very good returns. Unfortunately, it seems that Indian investors could be better informed about the investment opportunities in the stock market.

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