Question

Briefly discuss any three (3) constraints that an investor might face in designing his investment strategy and how they affect that strategy.

Answer 1

Answer-

Following are the three constraints that an investor might face in designing his investment strategy along with their effect on the strategy:

1] Liquidity - Liquidity regards investment is the cash conversion capacity of the investment approximately to their market value. Normally, investors require cash to meet unexpected requirements like in case of emergency or making new investments etc. but no investor wants to sell these at unfavorable conditions. Thus while making any investment plan this liquidity criteria is important and is required to be considered.

2] Time period - It is the time lag between making of investment and funding requirement. Investors with long gestation period i.e. having long term investment require less liquidity and are ready to accept portfolio risk. But losses from short term investments are difficult to recover than long term investment though short term investments have more liquidity. All these factors should be considered while making an investment plan.

3] Legal and regulatory rules - Usually, individual investors aren't required to consider these legal rules and regulations but institutional investors like companies, corporate business sectors, professionals etc. are required to have proper knowledge of these regulations regarding investment plans.