5 Important Steps of Investment Process

Investment Management Process

Investment Process

When we speak of investment, I am sure most of you would think of investing in some fixed deposit or a property or some of you would even buy gold. But there is much more to investing. An investment is the purchase of an asset with an expectation to receive return or some other income on that asset in future. The process of investment involves careful study and analysis of the various classes of assets and the risk-return ratio attached to it.

An investment process is a set of guidelines that govern the behaviour of investors in a way which allows them to remain faithful to the tenets of their investment strategy, that is the key principles which they hope to facilitate outperformance.

There are 5 investment process steps that help you in selecting and investing in the best asset class according to your needs and preferences.

Step 1- Understanding the client

The first and the foremost step of investment process is to understand the client or the investor his/her needs, his risk taking capacity and his tax status. After getting an insight of the goals and restraints of the client, it is important to set a benchmark for the client’s portfolio management process which will help in evaluating the performance and check whether the client’s objectives are achieved.

Step 2- Asset allocation decision

This step involves decision on how to allocate the investment across different asset classes, i.e. fixed income securities, equity, real estate etc. It also involves decision of whether to invest in domestic assets or in foreign assets. The investor will make this decision after considering the macroeconomic conditions and overall market status.

Step 3- Portfolio strategy selection

Third step in the investment process is to select the proper strategy of portfolio creation. Choosing the right strategy for portfolio creation is very important as it forms the basis of selecting the assets that will be added in the portfolio management process. The strategy that conforms to the investment policies and investment objectives should be selected.

There are two types of portfolio strategy-

  1. Active Management
  2. Passive Management

Active portfolio management process refers to a strategy where the objective of investing is to outperform the market return compared to a specific benchmark by either buying securities that are undervalued or by short selling securities that are overvalued.  In this strategy, risk and return both are high. This strategy is a proactive strategy it requires close attention by the investor or the fund manager.

Passive portfolio management process refers to the strategy where the purpose is to generate returns equal to that of the market. It is a reactive strategy as the fund manager or the investor reacts after the market has responded.

Step 4- Asset selection decision

The investor needs to select the assets to be placed in the portfolio management process in the fourth step. Within each asset class, there are different sub asset-classes. For example, in equity, which stocks should be chosen? Within the fixed income securities class, which bonds should be chosen?

Also, the investment objectives should conform to the investment policies because otherwise the main purpose of investment management process would become meaningless.

Step 5- Evaluating portfolio performance

This is the final step in the investment process which evaluates the portfolio management performance. This is an important step as it measures the performance of the investment with respect to a benchmark, in both absolute and relative terms. The investor would determine whether his objectives are being achieved or not.


After all the above points have been followed, the investor needs to keep monitoring the portfolio management performance at an appropriate interval. If the investor finds that any asset is not performing well, he/she should ‘re balance’ the portfolio. Re balancing means adding or removing (or better call it adjusting) some assets from the portfolio to maintain the target level. Re balancing helps the investor to maintain his/her level of risk and return.

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