Chapter 11, Problem 1LO

Summary Introduction

To determine: The role of investment in personal financial planning process and the various objectives of investment.

Explanation of Solution

Financial planning process is related to estimating the financial need of an individual over a period of time to achieve the desired objectives. It may include the purchase of a four wheeler, a house or to plan for the comfortable retirement. Investing helps in achieving these objectives by accumulating the funds over the defined period of time. Individual estimates the funds required to achieve the objective and the time period after which the fund is required. On the basis of requirement the investment option is chosen so as to leave the individual with the desired amount at that time. Individual may invest the lumpsum or select to invest in systematic manner at a required rate of return with minimum risk. Various investing techniques are employed to determine the amount required to be invested so as to yield the desired amount.  It helps to meet the long term high financial needs with ease.

Various objectives that are associated with the investment are as follows:

To enhance the amount of current income by investing in the various options in the form of dividends or interests so as to meet the living expenses is one of the objectives of investment. Retired people seek to earn the regular income by investing in the plans yielding higher returns at lower risk.

Individuals invest for the purpose of making a major purchase such as down payment for the purchase of a house, meet the expenses of child’s college education, initiating a business, meeting retirement requirements and so on.

The individuals invest in the various investing options in order to accumulate funds for meeting the retirement needs.

Some of the investment options are deductible from the taxable income thus, reducing the tax liability of the individual. So, individual invest with the objective to gain out of the tax shelters.