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Investment Management

By: EconomyWatch Date: 23 November 2010

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The professional management of assets, such as real estate, and securities, such as equities, bond and other debt instruments, is called investment management. Investment management services are sought by investors, which could be companies, banks, insurance firms or individuals, with the purpose of meeting stated financial goals.

The need for investment management arises due to:

The existence of a large number of complex financial products

Financial market volatility

Changes in regulatory requirements

Investment Management: Who does it?

Every individual practices investment management to some degree, including budgeting, saving, investing and spending. However, an investment manager is one who specializes in placing money in diverse instruments in order to accomplish predetermined goals. Investment managers are also widely known as fund managers. Investment managers may specialize in advisory or discretionary management. When an investment manager merely offers suggestions regarding where to invest money and when to sell securities, the practice is known as advisory investment management. When an investment manager can take action in managing portfolios without requiring client approval, it is called "discretionary" investment management.

Investment management is often used synonymously with fund management. Moreover, terms like asset management, wealth management and portfolio management are used, with a thin line differentiating them. Asset management is often used for the management of collective investments, which refers to investing money on behalf of a large group of clients in a wide range of investment options. An example of this is mutual funds. Investment management that involves managing the investments of high net worth individuals is often referred to as wealth management. Asset management and wealth management are also called portfolio management.

Investment Management: What does it involve?

The process of investment management involves the following:

Setting investment objectives: Investment goals are different for individuals, financial institutions, banks, insurance companies and pension and mutual funds. For instance, the objective of a bank could be to achieve a minimum interest spread, while that for an individual investor could be to increase return on investment.

Formulating the investment plan: After setting the objective, the investment plan is formulated based on investor-related constraints, such as financial capacity and risk profile, as well as environmental constraints, such as government regulations, market conditions and the state of the economy.

Establishing the portfolio strategy: Based on the objectives and constraints, the ideal mix of asset classes is identified. These asset classes could include equities, fixed income securities, foreign securities, debt, real estate and/or currencies.

Selecting the assets: This involves selecting the individual options within the wide asset classes.

Measuring and evaluating performance: Investment management is an ongoing process. It is critical to consistently evaluate the performance of the portfolio and to improve it continuously.