Importance of Investment Decisions

Meaning of Investment Decision

Investment decisions concerned with the allocation of funds into different investment opportunities for the purpose of earning the highest possible return. It simply assists firms in selecting the right type of assets for deploying their funds. These decisions are taken by the investor or top-level managers who properly analyses each opportunity before investing any fund into them.

Importance of Investment Decisions
Importance of Investment Decisions

Importance of Investment Decisions

Affects Firm Growth

Investment decisions have long term effects on the earning potential and growth rate of a firm. These decisions decide the position of an organization in the coming future. Proper planning of investment may lead to a large flow of funds. Whereas, any wrong decision may prove disastrous for a firm existence leading to heavy losses.

Determines Risk

These decisions carry a high degree of risk as funds are committed for a longer period. Individuals invest a large amount on the basis of expected income in the future which is totally uncertain. Different tools and techniques are used by investors for analyzing available assets for a risk factor while taking such decisions.

Larger Investments

Investment decisions are taken for the deployment of huge funds for a longer period. Such decisions require proper attention as the firm has limited funds whereas demand exceeds the existing resources. Proper planning of investment and monitoring of expenditures should be necessarily done by each firm for attaining goals.

No-Going Back

Decisions related to investment are mostly of irreversible nature. It is impossible to revert back from such decisions once capital items are already acquired. Finding a market for disposing of permanent assets without incurring heavy losses is quite difficult.

Difficult Decisions

Investment decisions involve several complexities as they are based on future events that are beyond prediction. Estimation of future cash flows becomes a big problem as they change with variations in economic, political, social, and technological forces. It becomes very difficult to accurately predict future returns due to the uncertainty of future conditions.