Last week, we looked at introduction to investment. We looked at various definitions and returns on investments.
Today we shall concentrate on how to maximize the returns. There are three variables that affect the outcome of returns on investments. These are the duration of the investment or what is described as time, the amount invested and the rate of investment or interest rate.
- Time or duration: the longer the duration of an investment to maturity, the higher the return, all things being equal. Treasury bills of 91 days to maturity will have return lower that a government bond of say 5 years to maturity. More so, investment in shares would take longer for dividends to be received depending on the annual reports and the Board of Directors approving dividends. Starting a business will take a longer period for the benefits to be realized but is more rewarding than just putting the money in the savings account. In the savings accounts, you are really assured of the return but the business started could collapse or fail depending on a number of factors. With this, you should know the kind of investment that suits your appetite; whether short term or long term. That depends on your cash flow needs. Do you expect to earn return on investment quickly or you want something for the long term? That would influence your decision to take short or long term investments.
- Amount invested: the amount of investment is closely linked to your savings habit and disposable income. Your disposable income is what is left after deducting all your taxes and pension contributions. This is left for spending and investment. The higher your expenditure, the lower your amount left for investment. To allow a bigger chunk for investment, you need to cut down on the expenditure part. Amount invested depends on the capital outlay of the project you are targeting. You could start with basic savings accounts, grow it into mutual funds, shares or start-up capital. The return basically depends on the quantum of investment. If the investment is large, you are likely to gain much, all things being equal. You could also fail miserably in case things go bad. The advice here is to maximize investment by spreading your investment across various sectors instead of “putting all your eggs into one basket”. To get guidance on how you could enhance your savings habits, click here.
- Rate of return: this is the price the investees are prepared to pay the investors. In other words, the price of investment displayed on savings account, unit trusts, bonds, treasury bills, share price yields are what is called the rate of return. In order to maximize this rate, you will need to explore investment rates of similar nature. You could fall on investment advisors to help in your research and selection.
To maximize return on investment, all the three elements need to be at a certain optimum level. Longer duration, higher amount of investment and higher rate of return will all yield higher return on investment. Starting a business for example requires a lot of efforts, patience and diligence. It is the most risky if you compare with putting your money in the savings accounts, buying shares, buying government treasury bills and bonds, etc. Yet it is the most rewarding of all when things go well with you. In the investment parlance, we say the higher the risk, the higher the returns. For guidance on setting up your business, click here.