What Is Investment Management?

The rising sophistication of the Indian investment landscape runs parallel to the country’s growth prospects. The rapid, structural growth is categorised with increasing investments, growing digitisation, along with the emergence of novel asset classes and investing avenues. Amid this dynamic growth, optimal investment planning is key to ensuring growth and stability.

Optimal investing stems from keen investment management, which involves choosing the right assets that match the risk appetite and growth expectations. However, the process of successful asset allocation and portfolio management requires sufficient market expertise and experience. Therefore, investors must understand what is investment management to incorporate it optimally in their investment methodology, such that investors can achieve growth whilst maintaining their risk tolerance and desired autonomy.

What Is Investment Management?

The process of maintaining a holistic overview of the creation and maintenance of investor portfolios, either by the investors themselves or by expert financial advisors in exchange for a fee, is called investment management. It involves the curation of an investor portfolio by selecting the appropriate funds that match their growth expectations and risk appetite, continuous monitoring of the assets, and taking corrective actions.

Therefore, investment management is an ongoing process because it does not end with a one-time investment of investor funds into assets. It continues as the investment managers periodically review the performance of the portfolio and take corrective actions for underperforming assets. 

For example, Mr K invests ₹10 Lakhs into stocks, mutual funds, gold and FD in a particular ratio based on his risk tolerance and growth expectations. He reviews the portfolio performance quarterly to ensure it stays on track. This is called investment management.

However, an understanding of what is investment management, is incomplete without a comprehensive overview of its roles and responsibilities.

Roles and Responsibilities in Investment Management

Investment management is a comprehensive function that encompasses everything from establishing investment strategy, portfolio curation, to review and maintenance. Discussed below are the different roles and responsibilities ininvestment management.

• Strategy Development: The process of investment management begins with the assessment and establishment of the investor’s risk appetite and investment objective. This serves as the bedrock for portfolio curation and maintenance.

• Asset Allocation and Diversification: Based on the investment objective and risk profile, the portfolio of an investor is curated. There are two aspects to it. First, which assets can be invested in and second, in what proportion. For instance, a 23-year-old Mr K prioritises growth and has medium to high risk tolerance. Therefore, he chooses to invest 50% in equity, 30% in mutual funds, 10% in debt, and 10% in gold.

• Review: Investment management is not a one-time phenomenon. The portfolio must be analysed periodically, say monthly, quarterly, or annually, to ensure that the portfolio allocation is consistent with the investment strategy. During review, the investor can find out if their portfolio is underperforming or if the portfolio risk profile has exceeded expectations. For instance, if Mr K invested a gross return of 18% from his total portfolio but actual returns were at 14%, this indicates underperformance.

• Corrective Actions: Based on the review report, investment management requires actions to be taken to solve the underperformance of any asset. Moreover, if the investment philosophy or objective of the investor has changed, the portfolio can also be manoeuvred to fit the change. Furthermore, investment management also allows investors to react to wider market movements and take necessary actions.

• Research and Analysis: Investment management uses fundamental and technical analysis to choose appropriate assets and their proportion for investment. Various market trends and economic factors are also considered to choose appropriate assets. Unprecedented market volatility, credit issues, investment opportunities, etc., must be observed to dynamically manage the portfolio. This allows portfolio customisation to protect against risk and take advantage of market opportunities.

• Regulatory Compliance: Investment management ensures that all investing actions comply with the legal regulations. Moreover, it allows structuring investments efficiently to minimise the tax burden.

While the exhaustive roles and responsibilities clarify the key essence of investment management, it is often not enough. The answer to what is investment management often changes a little based on the type of investment management in question.

Types of Investment Management

Investment management functions can be performed either by the investors themselves, by financial advisors or a combination of both in varying proportions. The decision of which investment type suits an investor depends on the degree of autonomy and control they desire, their investment expertise and experience, etc. Discussed below are some key investment management types.

• Active VS Passive Investment Management

Particulars	Active Management	Passive Management
Objective	It aims to outperform the market benchmark	It replicates the performance of the market benchmark
Returns	It offers higher returns than the benchmark	It offers lower returns than the benchmark
Risk	It has a higher risk than that of passive management	The risk is lower than that of active management
Requirement	It requires high market experience	It can be opted for by someone with lower market knowledge
Suitability	Suitable for market experts	Suitable for beginners

• Discretionary vs. Non-Discretionary Investment Management

Particulars	Discretionary Management	Non-Discretionary Management
Manager	It grants full decision-making authority to a third-party financial manager	In this case, a financial advisor can plan, customise, and oversee investments, but it requires client approval for trades
Fees	Fund managers, in this case, get a higher management fee	Fund managers, in this case, get a lower management fee

• Categorisation Based on Who Performs Investment Management

Particulars	Investor-led Management	Financial Advisors
Meaning	Investment management is performed by investors themselves	Investment management is performed by third-party financial advisors
Managemnet Fees	No fees payable because there are no fund managers	Management fees are payable to fund managers
Requirement	It requires high market experience	It can be opted for by someone with lower market knowledge
Suitability	Suitable for market experts	Suitable for beginners

Irrespective of the investment management type, the primary process remains the same.

Investment Management Process

The investment management process is an organised, iterative cycle that helps people or professionals allocate and manage assets to achieve financial goals. From planning to continuous modifications, it usually consists of several essential processes that guarantee alignment with objectives, risks, and markets.

Discussed below is the step-by-step process of investment management, with an illustration of Mr K, to help readers understand what is investment management.

Step 1: Define Objectives and Assess Constraints

The first step of investment management is to establish the objective of investment by assessing the goals and constraints. Investors specify their precise objectives, such as saving for retirement, paying for schooling, or increasing wealth, along with deadlines. This helps to ascertain the necessary returns required and the timeline within which they must be earned. 

However, goals must be vetted against the constraints to establish achievable objectives. The limitations, such as the existing monetary commitments, taxes, legal restrictions, personal preferences, etc., must be assessed.

For example, a 30-year-old Mr K wants to save and create a corpus of ₹50 lakhs for his retirement in 20 years.

Step 2: Determine Risk Profile and Policy Statement

Next, investment management examines the risk tolerance and aptitude of the investor in question by taking into account their age, income level, and prior performance. An Investment Policy Statement (IPS) is created to act as a guide. It outlines the goals, standards, acceptable assets, risk profile, and benchmarks. At the same time, surveys or simulations can be used to determine the risk tolerance of the investor.

For example, in the case of Mr K, his risk tolerance is medium, meaning that he aspires for equity exposure but wants to stay limited to mutual funds and blue-chip stocks.

Step 3: Develop Asset Allocation Strategy

Based on anticipated returns and determined risk appetite, the portfolio composition is decided. The total investible corpus is divided into different assets (like equity, mutual funds, corporate bonds, etc.) varying in their return rate, maturity, risk profile, etc., to balance growth, stability, and liquidity. An optimal portfolio diversification allows investors to earn growth whilst ensuring stability.

For example, based on the goal and objectives, Mr K decides to invest 30% of the funds in Nifty 50, 40% in large-cap funds, 20% in large and mid-cap funds, and the remaining 10% in gold.

Step 4: Monitor, Review, and Rebalance

Finally, investment management periodically monitors the performance of the portfolio in relation to benchmark performance and expectations. This stage also analyses the alignment of established goals in view of the dynamic market and personal circumstances. Based on these factors, the portfolio can be rebalanced by liquidating certain assets and diverting the funds into other investments.

For example, Mr K reviews his portfolio yearly. He notices that his large-cap mutual fund is underperforming compared to its peers. Therefore, he decides to liquidate and invest in another large-cap fund.

Although investment management is integral to investing, there are certain risks that investors must address to build optimal risk management strategies.

Risks in Investment Management

Risk is strongly associated with investment. Therefore, any dynamic and optimal investment management plan must address the popular risks mentioned below.

• Systematic Risks: Risks that affect the entire market, rather than a particular asset is called systematic risk. Such risks cannot be fully eliminated through diversification, but might be controlled. Discussed below are some popular systematic risks.

1. Market Risks refer to fluctuations in overall market prices due to economic downturns, geopolitical events, or recessions, causing securities to decline together.
2. Interest Rate Risk typically influences the bond market. When new bonds with higher yields enter the market, the market price of existing bonds falls as they appear less attractive to investors.
3. Inflation Risk: If inflation continues to increase, it erodes the return offered by the assets. Moreover, it reduces the overall purchasing power, resulting in a general recessionary trend.

• Unsystematic Risks: Risks that are specific to a particular asset or investment class, rather than the market in general, are called unsystematic risks. Such risks can be minimised through portfolio diversification and optimal asset allocation.

1. Default Risk: In case of debt assets, like bonds, investors run the risk of issuers defaulting on repayments.
2. Liquidity Risk: It refers to the risk of investors facing difficulty in selling assets quickly without significant price discounts.
3. Business Risk: If the business of the issuer underperforms, then returns on its assets, like stocks, can be muted.

• Other Risks: There can be other types of risks that can impact investments and must be analysed.

1. Reinvestment Risk: It refers to the risk of reinvesting the proceeds from maturing investments or coupons into assets with lower prevailing rates.
2. Horizon Risk: Volatility is a feature of the market, and short-term volatility can ease over time. Therefore, hasty and forced early liquidation can disrupt long-term plans and reduce returns.

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