Process of Investment Management ..pptx

Process of Investment Management ..pptx

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  Process of Investment Management Dr.LavanyaM.R Assistant Professor, Sri Ramakrishna College of arts and Science
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  Process of InvestmentManagement Investment management is a systematic and disciplined approach to managing financial assets and securities in order to achieve specific financial goals. The process involves a sequence of five essential stages that guide investors—from identifying their needs to evaluating performance. These stages are crucial in helping both individual and institutional investors maximize returns while managing associated risks
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  1.Establishing Investment Objectives The first and most fundamental step in the investment management process is establishing investment objectives.  This stage involves identifying the investor’s financial goals, risk tolerance, time horizon, liquidity needs, and tax situation.  Investment objectives vary based on the investor's life stage, income level, and future plans.  For example, a young investor with a long-term outlook may prioritize capital appreciation and accept higher risks, whereas a retiree might focus on capital preservation and stable income.  Clearly defined objectives act as a guiding framework for all subsequent decisions in the investment process
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  2.Investment analysis andvaluation  The second stage involves researching and assessing various investment options to determine their potential risks and returns.  This includes fundamental analysis, which examines a company’s financial statements, earnings potential, industry position, and economic outlook, as well as technical analysis, which focuses on historical price patterns and market trends.  For more advanced evaluation, quantitative models may be used.  Valuation techniques such as Discounted Cash Flow (DCF), Price-to- Earnings (P/E) ratio, and Yield to Maturity (YTM) help investors determine whether a particular asset is undervalued or overvalued.  The goal of this stage is to identify sound investment opportunities that align with the established objectives.
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  3. Portfolio Construction In the third stage, portfolio construction, which involves selecting a combination of securities and assets to create a balanced, diversified investment portfolio.  Effective portfolio construction depends on asset allocation—deciding the proportion of funds to be invested in various asset classes such as equities, bonds, real estate, and cash equivalents.  The process also includes diversification to spread risk across sectors, industries, and geographies.  Investors aim to optimize the trade-off between risk and return by applying concepts like Modern Portfolio Theory (MPT), which helps in constructing an efficient portfolio that provides the highest return for a given level of risk.
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  4.Portfolio Management  Oncethe portfolio is constructed, the next phase is portfolio management, which focuses on the active or passive administration of the investment portfolio over time.  This includes monitoring the performance of individual investments, assessing market conditions, and making necessary adjustments to maintain alignment with the original investment strategy.  In active management, fund managers frequently buy and sell securities to outperform market indices, whereas in passive management, the portfolio simply tracks a benchmark like the Nifty or S&P 500.  Portfolio management also involves regular rebalancing—realigning the proportions of assets to maintain the intended risk-return profile, especially when market movements cause portfolio drift.
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  5.Performance Evaluation The finalstep in the performance evaluation, which involves reviewing the portfolio's returns in comparison to the stated objectives and relevant benchmarks.  This evaluation is done using key performance indicators such as absolute return, relative return, and risk- adjusted measures like Sharpe Ratio, Treynor Ratio, Alpha, and Beta.  Performance evaluation helps identify areas of strength and weakness in the portfolio and provides valuable insights for refining future investment strategies.  It also ensures accountability and helps investors or fund managers make informed decisions moving forward.
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  Investment Management Process FocusArea Key Activities Process 1 - Establishing Objectives Goal Setting Define return goals, risk, time horizon Process 2 - Analysis & Valuation Research Select securities using fundamental, technical, or quantitative analysis Process 3 - Portfolio Construction Asset Mix Build a diversified portfolio based on asset allocation Process 4 - Portfolio Management Monitoring Supervise portfolio, rebalance when needed Process 5 - Performance Evaluation Review Measure success, adjust strategy if required