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Investment management

ArticleID 107  
Writer Isaac Thuku
Category Personal Article


Investment management is the process of managing money or funds. The investment management process shows how an investor should go about making decisions about their investments.

Investment management process can be disclosed by a five-step procedure:

• Setting of investment policy.

• Analysis and evaluation of investment vehicles.

• Formation of diversified investment portfolio.

• Portfolio revision

• Measurement and evaluation of portfolio performance.

Setting of investment policy

This is the first and crucial step in investment management process. An investment policy comprises setting of investment objectives among other things. The policy must have specific objectives regarding the investment return requirement and risk tolerance for the investor. Identifying investor’s tolerance for risk is the most important objective, because it is obvious that every investor would like to gain the highest returns possible.

Because of the positive relationship between risk and return, it is not appropriate for an investor to focus their goals only on making money. Investment objectives should be considered in terms of both risks and return. The investment policy should also state other important constraints which might influence the investment management. Constraints can include any liquidity needs, projected investment horizon, among other unique needs and preferences of investor.

The investment horizon is the period of time for investments. Projected time horizon may be short, long or even indefinite. Setting of investment objectives for individual investors is based on the assessment of their current and future financial objectives.

The required rate of return for investment depends on what sum can be invested and how much investor needs to have at the end of the investment horizon. Wishing to earn higher income on his / her investments, the investor must assess the level of risk they should take decide if it is worthwhile for him or not.

The investment policy may include the tax status of the investor. This stage of investment management concludes with the identification of the potential categories of financial assets for inclusion in the investment portfolio. The identification of the potential categories is based on the investment objectives, amount of investable funds, and investment horizon and tax status of the investor.

Investment management
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