What is the Investment Process?
An investment process refers to a set of guidelines individuals or organisations follow to achieve their financial objectives. It is a systematic and structured procedure and focuses on maximising returns while minimising risks. It aims to avoid emotional investment decisions.
When investors understand the process of investment, they are in a better position to track the performance of their investments and make the required adjustments.
What is the Significance of the Investment Management Process?
The investment management process is crucial in financial planning because it ensures your investments align with your financial needs and goals.
It enables you to manage and mitigate investment risks effectively, as well as optimise returns and facilitate capital growth.
Five Steps of the Investment Decision Process
1. Determining investment goals and objectives
Planning is the first step of an investment management process. It focuses on setting clear and specific goals for the short and long term. Your short-term goals can be paying education fees or buying a car. Your long-term goals can be retirement planning. These goals help to formulate your investment strategies.
A financial advisor can support you in outlining your financial goals. They will vary based on factors like age and income. For instance, the younger generation will focus on wealth accumulation. older people often prioritise income generation and retirement planning.
2. Evaluating current financial conditions
Disciplined savings are a must to kickstart an effective investment decision process. So, after getting your financial goals in place, examine your existing financial situation. This step includes understanding your income, assets, liabilities, monthly expenses, and risk tolerance. You must know how much loss you are capable of handling.
3. Allocating assets
Invest your money in different asset classes to build a portfolio according to your risk tolerance. You can choose between equities, debt, bonds, and other asset classes.
The risk-return profiles vary for different investment vehicles, making allocation challenging. Generally, when an asset class has a higher return potential, it carries higher risks.
Investors with a high-risk tolerance should invest more in equities. On the other hand, those wanting to avoid huge volatility should take a more balanced approach.
4. Selecting an investment strategy to build a portfolio
The right investment approach can help you achieve your investment targets. The different investment strategies you can pick from are:
- Active: The investor actively remains involved in fund management.
- Passive: The investor does not track investments on a day-to-day basis. The investor waits and watches the generation of returns on investment.
- Short term: This strategy focuses on returns in a short period. The investor invests in cash funds, short-term bonds, money market instruments, etc.
- Long term: This strategy focuses on generating returns over many years. You can invest in mutual funds, gold, real estate, and stocks.
5. Monitoring, tracking, and updating the portfolio
The next step in the investment management process is tracking and managing your portfolio. Investors review the performance of assets regularly to ensure their investments are aligned with their financial objectives and goals.
Summing Up
Investing involves allocating your funds to financial instruments with the expectation of earning a positive return. Many people consider it a risky technique. But if you have a well-planned investment decision process, you can lower the risk and improve your chances of success.
Invest in various strategic investment options available with PNB MetLife to allocate your funds for benefits like financial safety and tax savings.
