How to choose a good investment alternative?

Investors do not invest in all investment alternatives in the market at a time. They choose a few among them. While choosing they have to consider some factors like investment objectives, rate of return, risk analysis, taxes, investment horizon etc.

Investment Objectives

All investors have some purpose of investing. Some invest to ensure regular income for retirement age, some for children's education and some for emergency fund. These different purpose require investment in different types of investment alternatives.

Rate of Return

Different alternatives offers different rate of return. An investor begins his selection process by looking at the past rate of return of the alternatives. These rates not continue in the future or new alternatives may not have past return. Therefore an investor should estimate the expected rate of return of the alternatives under consideration

Taxes

Government taxes income received from most investment alternatives. Further taxes to be paid also depend on the tax status of the investor. Therefore taxes are important factors which directly or indirectly influence the investor while taking investment decision.

Investment Horizon

Investment horizon means the length of time for which the investment is made. It is closely related to the investor's objectives of investment. The nature and type of investment alternatives to be selected depends on the investment horizon. If the investment horizon is long, the investment will have to be made on long term securities like bonds and stocks and if it is short the choice will have to be made from short term securities.

Risk Analysis

 Risk is understood as the possibility of suffering some form of loss or damage. It is the chances of unfavorable events. In the context of investment, it is the chance of incurring losses. The risk is the chances of incurring losses but we define it as the variability of returns because the analysis of risk in terms of variability of return produces same result as done the analysis of chances of incurring losses.