Investment Management: Importance, Pros and Cons

What is investment management?

Investment management is the professional management of investments with the goal of accomplishing certain financial goals. Investment managers are often in charge of managing portfolios of assets such as stocks, bonds, and mutual funds on behalf of individual or institutional clients. They make investment decisions based on their understanding of financial markets and investment possibilities, with the goal of maximising profits while minimising risk.

What is Investment Management Process?

The investment management process refers to the systematic technique used by investment professionals to manage investment portfolios on behalf of their customers or investors. Setting investing objectives, deciding asset allocation, picking individual securities, structuring the portfolio, managing risk, and monitoring performance are all part of the process. To fulfil the portfolio’s investment objectives, the investment management process seeks to maximise returns while minimising risks. It necessitates a thorough grasp of financial markets, investment products, and risk management approaches, as well as excellent analytical and decision-making abilities. Effective investment management may assist investors in achieving their long-term financial goals and building wealth over time.

There are various steps included in investment management process such as:

Setting Investment Goals: The first stage is to identify the portfolio’s investment goals. These goals should be explicit, quantifiable, and reasonable.

Asset Allocation: The second phase is to identify the appropriate asset allocation for the portfolio based on the investment objectives, risk tolerance, and investment horizon. This entails diversifying the portfolio among asset types such as equities, bonds, real estate, commodities, and alternative assets.

Security Selection: Once the asset allocation has been defined, the next stage is to pick specific stocks within each asset class. This entails analysing and assessing individual securities based on their fundamental and technical qualities.

Portfolio Construction: The fourth phase is to build the portfolio using the asset allocation and securities selection selections made in the previous steps. This entails picking the proper security mix and weighting it based on predicted returns, risks, and correlations.

Risk Management: The fifth phase is to monitor and manage portfolio risk. Setting risk boundaries, evaluating portfolio performance, and changing the portfolio as needed to keep risk within acceptable levels are all part of this process.

Performance Monitoring: The final stage is to assess the portfolio’s performance in relation to the investment objectives and benchmarks. This entails monitoring the portfolio on a regular basis, making modifications as needed, and reporting results to customers or stakeholders.

Advantages investment management:

Professional expertise: Investment managers are professionals who have the knowledge and experience to properly manage assets. They can assist investors in developing a well-diversified portfolio that matches with their investing objectives.

Risk management: Investment managers can assist investors in managing the risk involved with investing in financial markets. To reduce the danger of losses, they might employ a variety of investing tactics.

Time-saving: Investment management may save investors a lot of time since they don’t have to perform research, watch markets, or follow individual assets themselves. They may rely on the investment manager to make sound judgements on their behalf.

Access to a greater range of investment options: Investment managers have access to a variety of investment alternatives that ordinary investors may not have, such as private equity and hedge funds.

Disadvantages investment management:

Cost: Investment management may be costly. Investment managers often charge a fee for their services, which can cut into an investor’s returns. Furthermore, certain investing solutions may have substantial fees and charges connected with them.

Control: Investors who utilise an investment manager may have little control over the investments made on their behalf. They may be unable to choose particular investments or make adjustments to their portfolio without first communicating with the investment manager.

Conflicts of interest: Investment managers may have conflicts of interest that impact the investments they propose. For example, an investment manager may get a commision for promoting a certain investment product, even if it is not in the best interests of the investor.

Performance risk: Despite investment managers’ competence, there is no assurance that their investment plan will be successful. Market volatility, economic circumstances, and other unforeseeable occurrences might still have an impact on investments.