People usually make an investment to increase the value of their assets or to expect future profits. The goals of one’s investment can also vary, as mentioned in the following article.
Based on these various investment objectives, we can categorize them into three major categories, namely: liquidity, income, and growth. Let’s explore each of them in depth!
1. Liquidity
Effective financial management consistently takes into account the level of liquidity. Liquidity refers to the ease with which an asset can be converted into cash. Addressing liquidity is essential to ensure that any unforeseen or urgent needs can be met without disrupting cash flow and investment allocations in other asset classes.
Characteristics of liquidity-oriented investments:
- Designed for short-term or sudden/urgent needs
- High requirement to convert investment assets into cash (high liquidity)
- Low-risk level
- Can mitigate uncertain market movements
- Can be withdrawn at any time
This type of investment can be used for emergency funds or short-term fund preparation (less than a year), such as children’s school funds. An example of an instrument with high liquidity is the Money Market Funds, where funds are invested in short-term instruments such as deposits and bonds that mature in less than a year.
2. Income
This objective focuses on prioritizing stability by generating regular cash flow over time to increase income.
Characteristics of income-oriented investments:
- Suitable for medium to long-term needs
- Relatively low liquidity demands
- Moderate risk exposure
- Can be used to offset periodic expenses such as installments or credit obligations
- Prioritizes stability of returns over fluctuations in asset prices
Income-oriented investments can be allocated for funding pension schemes, monthly utility bill payments, and home and vehicle installments. Instruments that can provide regular cash flow or income include Bonds and Fixed-Income Funds, where funds are invested in bond instruments issued by the government and corporations. Bonds provide periodic coupons, which can be reinvested or distributed as dividends from mutual funds, depending on the product and investment manager policies.
3. Growth
This investment strategy focuses on financial management that aims to deliver high returns and result in significant capital growth.
Characteristics of growth-oriented investments:
- Typically used for long-term needs that require a substantial amount of money
- Low liquidity demand
- High risk exposure
Growth-oriented investments are suitable for goals such as building a fund for a wedding within a period of more than 5 years, saving for a vacation to Europe, or creating a down payment fund for a mortgage. Common investment instruments for this strategy include Stocks and Equity Funds. These funds are invested by the Investment Manager into a variety of company stocks with the potential for higher returns, but they also come with a higher level of risk.
In conclusion, the selection of investment instruments should be based on financial goals, taking into account the time horizon and liquidity needs. The higher the short-term liquidity needs, the lower the risk and potential return, and vice versa. Does this clarify the three main objectives of investing? Let’s identify your investment goals and start investing using the Welma feature on i myBCA now!