Which phase start after the investment decision is taken?
Investment decision refers to financial resource allocation. Investors opt for the most suitable assets or investment opportunities based on risk profiles, investment objectives, and return expectations. Show
Firms have limited financial resources; therefore, the top-level management undertakes capital budgeting and fund allocation into long-term assets. Managers overseeing business operations opt for short-term investments to ensure liquidity and working capital. Investment decisions are also influenced by the frequency of returns, associated risks, maturity periods, tax benefits, volatility, and inflation rates. Table of contents
Key Takeaways
Investment Decision ExplainedInvestment decisions are made to reap maximum returns by allocating the right financial resource to the right opportunity. These decisions are taken considering two important financial management parameters—risks and returns. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked Investors and managers dedicate a lot of time to investment planning—these decisions involve massive funds and can be irreversible—impact on the investors and business is long-term. Also, individuals and corporate investors have to decide between various options—assets, securities, bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more, debentures, gold, real estate, etc. For businesses, investments could be in the form of new ventures, projects, mergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more, or acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more as well. Investment decisions are further classified into short-term and long-term. For example, the final decision may involve a capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more on assets that pay off in the long run or an investment in inventory that converts into sales within a short period. A company might attempt expansion by taking up new projects; a business might increase the capacity of an existing facility. Capital investment is required for replacing an obsolete asset as well. In business, decision-making is everywhere. ProcessInvesting in an asset, security, or project requires a lot of patience; ideally, the decision-making process should be analytical. Following is a five-step process decision-making process that guides investors:
Factors Affecting Investment DecisionAn investment is a planned decision, and some of the factors that are responsible for these decisions are as follows:
ExamplesExample #1Let us assume that Quinn possesses $12000 in her savings account. She decides to invest, but her priority is low risk and high liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more. Her portfolio manager suggests XYZ mutual funds. This mutual fund allocates 75% of her money into debentures & bonds and 25% into stocks. Also, she can withdraw funds at any time. Example #2Caisse de Depot et Placement du Quebec (CDPQ) and DP World plan co-invested $5 billion into three prominent UAE assets: As a consequence of the investment, CDPQ gained an expansive exposure—a logistics chain comprising 8700 global companies—3.5 billion-plus consumers worldwide. In 2021, these assets yielded an overall revenue of $1.9 billion. Frequently Asked Questions (FAQs)What is the investment process? In financial management a five-step investment process is followed: What are the factors affecting investment decisions? Given below are the various factors that influence decisions: What are the types of investment decisions? Investment decisions are classified into: Why is an investment decision important? In organizations, investment decisions are crucial for growth and profitability—impact cash flows—have a long-term impact as many of these decisions are irreversible. Even with limited funds, individuals can obtain impressive returns if the investment is well-planned. Managers must calculate the risks associated beforehand; this way, they can avoid losses. Recommended ArticlesThis has been a guide to what is an investment decision and its meaning. We discuss the factors affecting final investment decisions, the financial management process, & examples. You can learn more about it from the following articles – What are the 5 stages of investment decision process?This is a five stage process. The stages in this process are Search For Investment Decision, Screen Projects For Further Investigation, Define Projects Clearly, Evaluate Alternatives, Select Accept Or Reject Alternatives.
What are the phases of investment?The investment phases typically include the planning phase, the accumulation phase, the distribution phase, and the legacy phase. Most of the cash inflows into the investment pool happen during the accumulation phase.
What is the first step in the investment decision process?Step 1: Assess your risk tolerance
Making the first step right is crucial to the long road of investments. Of the five steps, the first is to assess your risk tolerance and decide the most suitable asset allocation for yourself. Different people have different attitudes towards investment.
What is the investment decision process?The investment process involves the following steps: formulating investment objectives, ascertaining the risk profile, allocating assets, and monitoring performance.
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