Investment Objective

Investment objectives refer to financial goals that motivate investors to invest their funds in a particular security. Investors must be certain about their goals before initiating a long-term investment. This way, they can plan and modify expectations realistically. So, it helps investors make informed decisions, allocate their assets effectively, and evaluate the performance of their investment portfolios over time.

Financial advisors help in decision-making, but ultimately, the investor decides. Besides, financial advisors suggest investment options based on the set objectives. Most investors prioritize one of the two—growth or income. Risk tolerance plays a crucial role in investment decisions.  

• Investment objective comprises factors that motivate an investor to buy or sell a certain asset. It refers to an investor's expectation from a particular investment.
• The period of investment is a crucial component of investment goals. Therefore, investment goals are subdivided into - primary objectives and secondary objectives.
• Investment goals also depend on the purchasing power of the investor. If an individual has sufficient disposable income, they can afford to take increased risks.
• Often investors are worried about emergency funds—the provision to withdraw money before maturity. Hence, liquidity is a crucial component of investment goals.

Investment objectives are classified into two—primary and secondary. Primary objectives comprise the most important financial goals. For example, securing a secondary source of income, holding an asset long-term, ensuring financial safety, etc., can be the primary objective of investing.

Secondary objectives rank lower in priority; they add to the primary objective. Tax savings and liquidity are some common examples of secondary objectives.

Typically, investments are assets bought in the present with the expectation that they would yield higher returns in the future. Over a period, investments can generate either profits or losses. The income generated by investments can fulfill financial goals—overcoming income shortages, debt repayment, education, student loans, etc.

Along with purchasing power, individual goals are crucial in selecting the right investment. In a portfolio, the individual's goals determine the allocation of funds. In addition, investors consider their risk appetite, maturity period, and expected returns.   

Investors and managers spend considerable time on investment planning—these decisions involve massive funds and can be irreversible—the impact on the investor or business is long-term. Investment goals are also classified into short-term and long-term. For example, the final decision may involve a capital expenditure 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.

Let us look at investment objective examples to understand financial planning better.

Example #1

Robert and Amanda are a couple; they have two children. They want to start investing and hire a financial advisor—Jacob. Right away, Jacob enquires about their primary investment objective.

Their objectives are as follows:

• To pay their children's tuition fees (their first child will go to college in 10 years, the second child in 15 years).
• To maintain an assured source of income.

Then, Jacob asks them about their current financial position. He gathers information about disposable income, risk appetite, and purchasing power. The couple was ready to invest $1000 every month.

Based on collected data, the financial advisor suggests the following plan:

• Invest $1000 on bonds issued by 2-3 companies.
• Purchase a T-bill (month one plan)
• Invest $650 in a mutual fund for the first child and $350 in another mutual fund for the second child (second month onwards)

Example #2

Investment objectives are often considered from the perspective of the investors. However, companies that create investment opportunities also have their own investment goals.  

Chelverton UK Dividend Trust has the following objective: to provide shareholders with high income and capital growth. In addition, the company wants to provide a sufficient capital return (secondary objective).

Keeping with the objective, the company's return per ordinary share increased by  41% (year-on-year), and declared dividends increased by 7% (per share). 

Example #3

Let us assume that Quinn possesses $12000 in her savings account. She decides to invest, but her objective is low risk and high liquidity.

Her portfolio manager suggests XYZ mutual funds. This mutual fund allocates 75% of its money into debentures & bonds and 25% into stocks. Also, she can withdraw funds at any time.

Most investors have one of two objectives–growth or income. Some investors want both. Let us understand these objectives in detail:

#1 - Income

Investments can create an alternative source of income. For experienced investors, it can even become the primary source. Similarly, returns from investments are crucial for retired individuals.

If investors have a low tolerance for risk, they look for regular returns. For such investors, low-risk securities like bonds, treasury bills, certificates of deposit, and preferred stocks are suitable. Here, returns are low, but so is the risk.

#2 - Growth

Some investors want more than just income and are willing to take higher risks. Capital growth refers to value appreciation. Such investors should purchase high-value assets and hold them long-term.

For example, the main investment objective of mutual funds is growth. Held for a long period, a mutual fund can fulfill investors' long-term goals. For example, the long-term goal could be to retire early, dream vacation, get a college degree, etc.

#3 - Growth And Income

Some experienced investors aim for both—growth and income. They have a moderate tolerance for risk. They create a portfolio of investments with varying risk profiles. One investment offers a steady source of income; another possesses high growth potential. This is known as portfolio diversification.

Stocks are another example. High-performance stocks can do both—provide regular income and grow exponentially. In addition, investors gain from the difference between the purchase and selling prices when selling the stock.

This article has been a guide to Investment Objective and its definition. Here we explain the concept in detail using its examples and then compare it with income. You can learn more about it from the following articles –

• Investment Policy Statement
• Investment Theory
• Unit Investment Trust