Question

Recommend three investment objectives for short-term investments.

Answer 1

All short term investment decisions are influenced by three objectives – security, liquidity and yield. A best

investment decision will be one, which has the best possible compromise between these three objectives.

(i) Security

Security means funds invested should be at reasonable safety i.e. the investment should not be risky. A high risk investment provides the chances of high returns but there are chances of loss of funds invested. Hence, if investment is to be made for a short term, priority should be given to the security of the funds invested.

(ii) Liquidity

Investment made should be liquid enough so that funds can be withdrawn from it whenever needed.Many of the investments are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.

(iii) Yield

Yield refers to the expected returns from the investment made. A high yield security may be risky. A low yield security may be less liquid.  

Individually these objectives are very powerful in influencing the investors. Collectively they work against each other forcefully. Hence the best investment decision will be one, which has the best possible compromise between these three objectives.

When selecting where to invest our funds we have to analyze and manage these three objectives.

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