Question

Can economic conditions impact the investments? Why or why not?

Answer 1

For investments, there can be multiple options. Investments can be done in least risk places like banks FDs, treasury Bill's etc, moderate risks like Bonds, equity mutual funds, residential real estate, blue chip funds, stable and large or medium cap stocks etc and can also be invested in high risk investments like volatile stocks, hedge funds, IPOs, crowdfunding, private company investments etc. The higher the risk, in generally, the higher the expected return. Also each investment product has specific risk return characteristic making it more or less suitable to certain types of investors.

The sensitivity and impact of economic conditions on the investment and its risk and return depend on the instrument investment is made. The investments in stock market either as direct investment in stocks or through funds like mutual funds and hedge funds are very sensitive to market movement and generally economic environment. Thus an unexpected news of possible fall of financial giant (like in the Lehman fall of 2008) can lead to a huge fall in stock market around the world leading to huge losses for all products and stocks traded as stock market is generally a reflection of sentiments of people. If the economic outlook is positive and all participants are expecting a booming economy, all products and stocks in generally will see price rise. Thus economic condition have a huge impact on investment growth.

The economic conditions not only impacts stock market but other relatively safer instruments too. For example, an increasing inflation in the market can lead to the central bank increasing the key rates like repo rates & reverse repo rate which can have a ripple down effect leading to other private banks increasing their key rates. Thus the investment return available to the investor for bank FDs is depended the economic condition in the country.

Thus all investment options are impacted in one way or the other by the economic conditions prevalent not just in their state or country, but of the whole world to some extent.