Investor's Considerations
As mentioned above, every investor before taking an investment decision, must consider the following aspects:
Risk: The primary consideration for the investor will be the safety of the funds lent. Every investment option will have an element of risk.
Liquidity: The investor will also give due consideration to the liquidity of the instrument, which depends mainly on the secondary market.
Returns: The investor generally expects to earn a return that compensates for the risk exposure taken by investing in the security. Unorganized sector generally offers high returns, but the associated risks are also high. Investors generally stick to the risk-return preferences since multiple investment options are available.
Tax Planning: To get certain tax benefits, investors can invest in those securities that offer tax incentives, as the post-tax returns are of significance to an investor.
Cash Flows: The investment decision of the investor will also depend on the period for which the surplus funds are available for investment. The investor will, therefore, consider the repayment schedule by way of interest and principal.
Simplicity: The salient features of the instrument should be easily understood by the investor in order to take the investment decision.
While it may not be possible to get the best of all the above in a single instrument, issuers and investors consider those which are of more priority to them. However, these considerations keep changing depending on the changing environment.
In such a scenario, instrument designing itself becomes a subject of specialization.