Question

An investment would be considered a good prospect under which of the following conditions?

Answer 1

A) Introduction:

• Often, an investment opportunities that look attractive initially ends up as a loss. Therefore, one should look at the traits of investment carefully to avoid disappointment at the later stage.

B) Characteristics or conditions of good investment opportunities are as follows:

1. It provides liquidity:

• Different investment options comes with variety of liquidity levels. Everytime on adding a new investment into the portfolio basket, consider its effect on the overall portfolios liquidity levels.
• Investment in small business, Real estate are less liquid in nature. On the other hand, Large cap stocks and Exchange traded funds are highly liquid.

2. Add diversification benefits:

• For minimising the risk of potential losses from the overall portfolio, diversification is key element because it helps maintaining the health of portfolio in the sense, one portfolio poor performance can be offset by another portfolios good performance and so on.
• Adding new investments in portfolio, which has low correlation with the traditional asset classes provides with minimised portfolio risk & volitility.

3. Paying for a fairly valued investment:

• The price of the good investment should always be reasonable and based on assumptions supporting reasonal growth.
• A security or investment is fairly valued if its Market value equals its True Intrinsic value. Mostly the stocks are valued using the Discounted Cash Flow method.

4. Increase in value in long run:

• Company increases its value on reinvesting the profits earned, thereby increasing its capacity.
• A company should be able to grow its market share within the growing market. And therefore, the underlying value of the investment will increase overtime.

5. Enable to generate income:

• The best long term investment options should give a continuous & steady yield along with passive income.
• Its about the ability of an investment to earn income and been profitable. It is more about attaining a sustainable cash flows than yielding higher returns.

6. Regulated & protected:

• The investment product should be properly structured and well regulated.
• The aim is to provide protection to the investors investing in an opportunity.