Investment management involves managing a portfolio of financial assets, including buying and selling investments, crafting short- or long-term strategies, optimising asset allocation, and formulating tax-efficient plans. This process can be undertaken independently or with the guidance of a professional investment manager.
In this article, we are going to explore the definition of investment management in more detail and delve into the intricacies of the process, including its various advantages and disadvantages.
What is investment management?
Investment management entails dynamically managing a basket of financial assets to ensure that the returns from the investments meet investors' financial goals. It is an ongoing process that involves devising and implementing strategies tailored to their objectives, risk tolerance and horizons. Although investment management is usually done with the help of a professional experienced in the financial markets, investors may also choose to do it independently instead.
An example of investment management
A mutual fund’s administration is one of the simplest and most common examples of investment management. In this investment option, an investment manager collects money from many investors to create a large pool of funds. The manager then invests this pool in various securities like stocks, bonds and other assets, depending on the fund’s objective.
For instance, a mutual fund might focus on technology stocks and aim to capitalise on the sector's growth. The manager will then actively monitor market conditions, adjust the portfolio as needed, and attempt to achieve the best possible mutual fund returns for investors while managing risk. Investors benefit from this kind of professional management and pay a fee for these services in exchange.
How does investment management work
Investment management involves overseeing a portfolio of assets to meet specific financial goals. An investment manager first assesses the client's financial objectives, risk tolerance and time horizon. Based on this, the manager develops a tailored investment strategy and selects suitable assets such as stocks, bonds, real estate or even alternative investments.
The manager then buys the assets in the client’s preferred asset allocation, monitors and makes adjustments as market conditions change and sells these investments to generate returns as needed. Regular reviews and rebalancing ensure that the portfolio remains aligned with the client's goals.
The objective of investment management
The primary objective of investment management is to maximise the return-generation potential of your portfolio while simultaneously minimising risks. Return maximisation is often achieved by investing in financial assets suited to the investor’s specific financial goals. Risk minimisation, on the other hand, is achieved with the help of risk management strategies. These include diversification of investments, asset allocation, hedging and stop-loss orders, among others.
The process of investment management
Now that you are aware of the meaning of investment management, here is a brief, step-by-step overview of how the process works.
- Determination of Investment Objectives
The first step in investment management is to find out what your investment objectives are, whether they are short-term or long-term. Your investment objectives play a huge role in determining the kind of investment plan you need to opt for and the type of assets you need to include in your portfolio. While establishing your objectives, it is a good idea to also determine your risk tolerance and investment horizon. - Formulation of an Investment Plan
Once you have determined your investment goals, risk tolerance and time horizon, the next step is to come up with an investment plan. Here, you can decide the kind of approach you wish to take.
For example, if you wish to generate returns higher than the overall market, an active investment strategy may be suitable. On the other hand, if you are content with simply earning returns that match the overall market, you could consider opting for a passive strategy. - Selection of Investment Options
Once you have formulated your investment plan, you need to select the financial assets that are suitable for you. For example, if you are a young individual whose financial objective is to create long-term wealth, investing in the equity market through stocks or mutual funds may be ideal.
On the other hand, if you are closer to retirement and tend to focus more on capital preservation than returns, you could consider investing in debt instruments or government securities. - Portfolio Monitoring
Investment management is not just about choosing the right investments. It is about managing the various risks effectively and ensuring that your assets perform according to your expectations.
To do that, you need to monitor your portfolio periodically and stay informed about market news and other developments that could potentially impact the value of your investments. Monitoring your portfolio regularly lets you take timely corrective action in the case of underperformance. - Portfolio Rebalancing
As time passes, the value of your portfolio changes. This could potentially skew your asset mix, reducing its ability to generate returns according to your expectations. This is why it is necessary to rebalance your portfolio. Rebalancing is an important part of investment management and ensures that your investments are in line with your objectives.
Types of investment management
Depending on the type of investments or the asset classes in a portfolio, investment management can come in any one of the following forms.
- Traditional investing
Traditional investment management is the process of investing in conventional assets like equity stocks, bonds, gold, money market instruments and the like. - Mutual funds
Management of mutual fund investments is all about deciding which assets to hold in the fund portfolio, the proportion of those asset holdings and their redemption cycle. - Hedge fund investments
This kind of investment management involves administration of holdings in hedge funds, which employ sophisticated strategies to capitalise on market opportunities while simultaneously hedging to reduce risks. - Real estate investing
Management of real estate investments includes handling property holdings as well as investments in REITs. - Private equity investments
In this type of investment management, experts oversee the purchase and redemption of equity in private companies that are not listed on the stock exchange. - Quantitative investments
Quantitative investment management revolves around the use of algorithms and data analytics to identify opportunities in the market and leverage them before they pass. - Cryptocurrency and alternative investments
This type of investment management includes overseeing the purchase, holding and sale of cryptocurrencies, other digital assets and alternative investments like art and bullion. - Portfolio management
Portfolio management is a broad form of investment management that involves monitoring several investment portfolios with various asset types and categories.
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Importance of investment management
Investment management is vital for building wealth and securing a financially stable future, especially in a growing economy like India. Inflation steadily erodes the value of idle cash, making strategic investments essential to preserve and grow wealth over time. Starting early can significantly amplify long-term returns through the power of compounding.
In India, wealth disparities remain a challenge. According to reports, a large portion of the population lacks adequate access to financial literacy and investment opportunities. While urban households often have greater access to financial instruments, rural and underprivileged communities face hurdles in wealth creation due to limited awareness and resources.
Investment management not only helps individuals grow their wealth but also bridges economic divides. By adopting structured investment strategies, such as mutual funds or systematic investment plans (SIPs), investors can protect their financial future while contributing to the overall economic development of the country. Moreover, these investments can be passed down to future generations, fostering generational wealth and reducing economic inequality.
Advantages of investment management
Investment management can be beneficial to investors at all stages of their financial journey. The top advantages of relying on investment management solutions include the following:
- Professional expertise to help you make informed investment decisions
- Reduced risk through diversification and ideal asset allocation
- Adjustable strategies to capitalise on market opportunities
- Access to unique investment opportunities and strategies
- Tailored strategies aligned with your goals and risk tolerance
- Ongoing investment monitoring and rebalancing to keep your portfolio on track
Disadvantages of investment management
Investment management also has some limitations that you need to be aware of, such as the following:
- Limited control over individual investment decisions
- Potential for conflicts over investment manager’s decisions
- Possibility of fees eroding net returns over time
- Difficulty in finding a suitable investment manager
An overview of the investment management industry
The investment management industry plays a crucial role in managing the assets of individuals and institutions. It encompasses a wide array of services like financial analysis, asset allocation and portfolio management. Investment managers in the industry aim to generate returns that meet their clients’ expectations while simultaneously managing risks.
The investment management industry is currently in a highly dynamic state as it evolves to keep pace with changing client requirements and emerging trends — like the rise of passive investing through ETFs and index funds, a growing focus on sustainable investments and an increasing preference to retire early. The industry is also being reshaped by technology as the use of algorithms and AI become more prevalent in portfolio management.
What does an investment manager do
An investment or fund manager is a professional experienced in navigating the complexities of financial markets. Their roles and responsibilities include the following.
- Conducting thorough financial analysis, research and risk assessment for investors.
- Formulating detailed investment plans and strategies tailored to the investor’s financial goals, time horizon and risk tolerance.
- Constructing and actively managing investment portfolios to ensure they produce returns as expected.
- Monitoring the performance of the portfolios and making changes as and when necessary.
Should you hire an investment manager?
Investment management requires a certain degree of expertise. While seasoned investors may be capable of managing most of their investments, beginners may require the assistance of an investment manager. Additionally, you may also need to hire an investment manager if:
- You have a complex investment portfolio or multiple financial goals
- You are considering investing in alternative assets that require specialised knowledge
- You are interested in investment opportunities or strategies that are not easily accessible to the average investor
- You need help with long-term financial planning and wealth creation
- You require expert assistance in managing and monitoring your investments regularly
Key takeaways
- Investment management helps you grow wealth by aligning financial assets with your goals.
- The process involves setting objectives, crafting strategies, selecting assets, and rebalancing portfolios.
- Diversification and professional expertise reduce risks while enhancing returns.
- Investment management bridges wealth gaps and combats inflation's effects on idle cash.
Conclusion
Investment management is important to navigate the various challenges that financial markets pose. However, managing your investments on your own may not always be feasible or produce the results you expect. Here is where hiring an investment manager can help. By harnessing the expertise of investment professionals, you can maximise the wealth-creation potential of your investments and minimise risks more effectively.
If long-term wealth creation is your objective, investing in mutual fund schemes may just be the right way to go. The Bajaj Finserv Mutual Fund Platform hosts over 1,000 funds across different categories. You can also compare mutual funds across different key metrics to determine what suits you best. The platform also has several useful tools, such as a SIP calculator and a lump sum calculator, to help you plan your investments better.
