The Importance of Investment, Risks, and Criteria for Suitable Choices
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NEPSE trading
Spending financial resources to acquire any form of asset with the aim of generating income or returns is called investment. According to Nepal Rastra Bank, for instance, if a farmer purchases a tractor for use in the fields, it constitutes an investment. The tractor enables quicker plowing, reducing costs and increasing income. Similarly, when a worker in foreign employment buys a savings bond, it becomes an investment, with the interest earned over a fixed period serving as the return. Purchasing company shares also qualifies as an investment, yielding dividends based on the company’s profits. Thus, expenditure made for income or returns is termed investment.
Nepal Rastra Bank emphasizes that understanding the concept of risk is equally important when discussing investment and returns. Risk refers to the uncertainty or deviation from expected outcomes. Since the returns from any investment cannot be guaranteed with certainty, risk is inherent. Investment mobilizes idle funds to generate returns and offsets the loss in money’s value due to inflation. However, the bank warns that investments made without proper thought, information, or due to herd mentality may not only fail to yield returns but also result in the loss of the principal amount.
The market offers various investment options, such as fixed deposits in banks, bonds, savings certificates, shares, mutual funds, real estate, trade, and self-employment ventures. Nepal Rastra Bank advises selecting the most suitable option based on one’s financial goals, spending priorities, risk tolerance, and expected returns.
Criteria for Investment Decisions
According to Nepal Rastra Bank, clarity on the following aspects is essential when making investment decisions:
Alignment of the investment purpose with financial goals,
Balance between the amount required for investment, savings, and future financial obligations,
The risks involved and one’s capacity to bear them,
Expected returns and the timeframe for achieving them,
The duration for recovering the full invested amount,
Existing regulations, laws, and tax provisions,
Diversification of investments (avoiding putting all funds into a single option to minimize risk),
Comprehensive knowledge of the sector in which the investment is being made.
Nepal Rastra Bank states that prudent mobilization of financial resources and risk-managed investments can foster economic growth and stability.
Source: Nepal Rastra Bank
