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Investment Management: 5 Important Steps of Investment Process

Investment management involves more than just buying and selling assets - it includes devising short- and long-term strategies for acquiring and disposing of holdings. There are 5 key steps to the investment process: 1) Understanding the client's needs, goals, and risk tolerance. 2) Deciding how to allocate investments across asset classes like equities and fixed income. 3) Selecting an active or passive portfolio strategy. 4) Choosing specific assets within each class. 5) Evaluating portfolio performance against benchmarks to ensure objectives are being met.

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Ankit Singla
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423 views3 pages

Investment Management: 5 Important Steps of Investment Process

Investment management involves more than just buying and selling assets - it includes devising short- and long-term strategies for acquiring and disposing of holdings. There are 5 key steps to the investment process: 1) Understanding the client's needs, goals, and risk tolerance. 2) Deciding how to allocate investments across asset classes like equities and fixed income. 3) Selecting an active or passive portfolio strategy. 4) Choosing specific assets within each class. 5) Evaluating portfolio performance against benchmarks to ensure objectives are being met.

Uploaded by

Ankit Singla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Investment Management

What Is Investment Management?


Investment management refers to the handling of financial assets and other
investments—not only buying and selling them. Management includes devising a
short- or long-term strategy for acquiring and disposing of portfolio holdings. It
can also include banking, budgeting, and tax services and duties, as well.

5 Important Steps of Investment Process

Investment Process
When we speak of investment, I am sure most of you would think of
investing in some fixed deposit or a property or some of you would
even buy gold. But there is much more to investing. An investment is
the purchase of an asset with an expectation to receive return or
some other income on that asset in future. The process of investment
involves careful study and analysis of the various classes of assets
and the risk-return ratio attached to it.

An investment process is a set of guidelines that govern the


behaviour of investors in a way which allows them to remain faithful
to the tenets of their investment strategy, that is the key principles which
they hope to facilitate outperformance.

Step 1- Understanding the client


The first and the foremost step of investment process is to
understand the client or the investor his/her needs, his risk taking
capacity and his tax status. After getting an insight of the goals and
restraints of the client, it is important to set a benchmark for the
client’s portfolio management process which will help in evaluating
the performance and check whether the client’s objectives are
achieved.
Step 2- Asset allocation decision
This step involves decision on how to allocate the investment across
different asset classes, i.e. fixed income securities, equity, real estate
etc. It also involves decision of whether to invest in domestic assets
or in foreign assets. The investor will make this decision after
considering the macroeconomic conditions and overall market status.

Step 3- Portfolio strategy selection


Third step in the investment process is to select the proper strategy
of portfolio creation. Choosing the right strategy for portfolio creation
is very important as it forms the basis of selecting the assets that will
be added in the portfolio management process. The strategy that
conforms to the investment policies and investment objectives
should be selected.

There are two types of portfolio strategy-

Active Management

Passive Management

Active portfolio management process refers to a strategy where the


objective of investing is to outperform the market return compared to
a specific benchmark by either buying securities that are undervalued
or by short selling securities that are overvalued.  In this strategy, risk
and return both are high. This strategy is a proactive strategy it
requires close attention by the investor or the fund manager.

Passive portfolio management process refers to the strategy where the


purpose is to generate returns equal to that of the market. It is a
reactive strategy as the fund manager or the investor reacts after the
market has responded.

Step 4- Asset selection decision


The investor needs to select the assets to be placed in the portfolio
management process in the fourth step. Within each asset class,
there are different sub asset-classes. For example, in equity, which
stocks should be chosen? Within the fixed income securities class,
which bonds should be chosen?

Also, the investment objectives should conform to the investment


policies because otherwise the main purpose of investment
management process would become meaningless.

Step 5- Evaluating portfolio performance


This is the final step in the investment process which evaluates
the portfolio management performance. This is an important step as it
measures the performance of the investment with respect to a
benchmark, in both absolute and relative terms. The investor would
determine whether his objectives are being achieved or not.

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