5 Important Steps of the Investment Process | Tata AIA Blog (2024)

11/10/2022 |

Investment is a tool that includes buying assets and expecting more return from them in future. So, an analysis of asset types and their risk-return ratio is essential before making an investment. But the investment decision process can be overwhelming for some with so many options available today.

This article discusses the five essential investment process steps that ensure more and stable returns in the long run.

Why is the Investment Process Important?

The investment management process is an essential part of financial planning. It provides an effective investment strategy to meet short and long-term financial goals on time. The goals may include retirement planning, wealth creation, buying a dream house, etc.

What is the Investment Decision-Making Process?

An investment decision-making process helps you decide how much to invest in equity, bonds, real estate, gold, etc. It provides a customised strategy for asset allocation, diversification, risk and portfolio management.

For an effective investment process, you must assess:

• Your investment goals
• How much do you need to invest to reach the goals?
• The degree of risk tolerance
• Diversification of portfolio
• Choosing the right assets
• Investment returns
• Tax* provisions
  

The 5 Important Investment Management Process Steps

• Evaluation of investment goalsEvaluation of investment goals is the first crucial step of the investment process. The purpose of your investment can be wealth creation, income generation or safety. Also, your goals may vary according to age and income.

  Usually, young people invest with the aim of accumulating wealth and have a risky appetite. But income generation and retirement planning are the purposes of investment when you reach midlife and later midlife. So, chalking out your investment goals help you hit the right investment asset to generate adequate returns.

• Evaluation of the present financial situationYou cannot implement an effective investment decision process without disciplined savings. So, after evaluating your long and short-term financial goals, it is necessary to know about your current financial situation. It helps you decide how much to save according to the time horizon of your investment goal. So, before picking an asset, assess your monthly expenses, assets, liabilities, risk-taking ability, etc.
  

• Asset allocationAfter an analysis of goals and financial situation, the next step is asset allocation. You can choose between equity, bonds, money market instruments, gold, real estate, etc according to your risk appetite and needs.

  Diversification of assets is also an essential step to minimise risks. Asset allocation usually depends on your present financial condition. But you can change it according to your risk appetite and needs which might change with income and age. Also, ensure to include liquid and fixed income assets in your portfolio. This helps to meet your urgent financial needs and long-term goals.

  Depending on your needs and risk tolerance, you can choose between the following portfolios:

  • Aggressive: The portfolio consists of riskier assets that generate apt returns.
  • Defensive: The portfolio has assets that are less sensitive to market movements.
  • Income: Income Portfolio helps provide regular profit distributions and dividends for the investor.
  • Hybrid: The portfolio has several assets including equity, bonds, real estate, etc.
  
  
• Choose the right investment strategyAn appropriate investment strategy is another crucial step for better and stable returns. The strategies of investment are as follows:
  • Short term: A short-term investment strategy offers returns in a short duration. It may include short-term bonds, cash funds, money market instruments, etc.
  • Long term: This strategy includes investments in stocks, mutual funds, real estate, gold, etc. Long-term investments generate returns over many years and usually offer lesser risk and more returns. While investing in long-term assets remember that the capital is locked in for a longer duration.
  • Active: An active investment strategy involves the active participation of the investor in fund management.
  • Passive: Passive investment strategy doesn’t need day-to-day involvement. It allows the investor to sit back while their investment generates returns.


• Track and manage your portfolioAfter following the above investment process steps, it is time to track and manage your portfolio. This step involves reviewing the performance of assets at regular intervals. It ensures that your investments are in line with your financial goals and needs. Apart from this, it is important to change your fund allocation according to performance, market volatility and risk tolerance. You must know when to sell and buy specific assets to generate more returns or avoid losses.
  

Conclusion

An effective investment process involves the right asset allocation, diversification and timely decisions. You must know when to buy and sell the asset to take advantage of the market opportunities. An investment process thus helps you build and manage your portfolio that is in line with your goals and risk tolerance.

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L&C/Advt/2022/Oct/2458

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