What Is Investment Management? The Ultimate Strategic Wealth Creation

What Is Investment Management?

• An individual earns and spends money throughout his or her life. There are differences between the earnings and spending of a person. This difference will lead a person either to borrow or to save to capitalise the money for the long term benefits from the income earned today.
• Investment management is the strategic and systematic process of managing a portfolio of investments to meet the estimated end goals. It involves buying and selling assets, creating investment strategies, and managing risk.
• Investment management, in simple terms, is about deciding where to put your money to grow it, and then making sure those investments are working well to meet your financial goals. It involves buying and selling things like stocks and bonds, deciding how much of your money to put into each and making sure your investments are aligned with your overall financial plan. 
• “Investment management is the process of management of money including investments, budgeting, banking and taxes also called as money management.”
• Investment management as the term suggests refers to the strategic management of the excess money by effectively deploying it in various capital appreciating asset classes like, equity assets, debt instruments, corporate or government issued bonds, etc. The primary objective is to strategically and analytically make investments with the end goal of creating wealth and having a strong financial position with the minimum risks associated.
• When the income earned is more than the consumption the difference between the two is used to save. One option is to save the excess money in a cupboard until some future time when consumption exceeds current income or another option is that the person can give up the present possession of that money for a larger amount of money that will be available for the future consumption by channelizing the capital in the right avenues.
• In the Economic’s sense there is an important concept as the time value of money. Money needs to be invested by taking into consideration the percentage rate of inflation which increases on a year on year basis and if one has to beat the inflation he or she has to earn the rate of interest greater than the inflation rate.
• When the savings are made to increase the capital over a certain period of time it is known as investment. The excess money has to be invested in some financial asset to get a significant return.
• Investment, therefore, is the sacrifice of some present value for the uncertain future reward. An investment decision is a trade off between risk and return.
• Sound and strategic investments result in creation of a strong financial position and possession of a significant corpus over time. The main element when it comes to making successful, strategic, medium to long-term sound financial investments one has to maintain consistency, patience, the right approach towards things and simultaneously, keeping a check if the probable investments are working out well as per the expectations or keeping up with the estimated return on investments (ROI).

Warren buffet, one of the most respected investors globally and the CEO & Chairman of one of the world's famous investment companies Berkshire Hathway has opined that if a person invests money in the market with even a hint of thought of selling it once the price rises is not at all an investment.

As per Sharpe, “Investment is sacrifice of certain present value for some uncertain future value.”

• The art of investment is maximizing the returns with minimum degree of risk.
• The ultimate objective is to grow and preserve wealth while minimizing risk
• An investment is said to be genuine if it has been made keeping in mind with a certain expected rate of return.
• The three important components of investment are time, inflation and uncertainty.
• Investments are generally linked to the global capital markets even though the proportions may vary as some investments are equity oriented, nevertheless, capital markets greatly influence the return on investments. Hence, investments are bound by time fluctuations in the market which makes the interest and the current inflation rate relevant within the economy.

Strategic Procedure For Investment Management:

• Strategic, systematic and analytical research on the potentially investment option along with the risk and reward ratios.
• Short term to long term strategies to excellently execute the investment plan.
• Systematic and optimum capital allocation in various financial securities in well calculated ratios as per the tenure, standard returns expected and the risks associated with the investment.
• Developing a sound and efficient tax planning strategy to optimise the profitability by legally reducing the tax obligations by opting for various exemptions and deductions.

Tax planning refers to the strategic arrangement of finances to minimise tax liabilities while complying with tax laws. It is a legal and ethical approach to minimize tax liability through permitted deductions and exemptions. 

• Monitoring and analysis of investment is one of the important determining factors for its potential success or failure.
• Execution is the most important stepping stone for any business/ financial transaction. Effective and timely execution of investments turns out to be a game changer and helps to be on tract with the standard estimates.

Characteristics of Investment:

Returns:

The primary objective behind making a successful investment is generating significant returns on the capital employed. Returns refer to the income earned on the capital invested.

Risk:

Risk is a component which follows every investment. Higher the risk higher will be the rate of return and vice versa.

Risk management plays an integral role in the business setting. Identifying and evaluating various financial risks relating to operational, credit, market risk, etc. The investor has to use various tools in order to reduce the risk associated and create risk management methods like investment in sound/reliable and creditworthy financial securities and insurances.

Risk is such a component which practically follows each and every business transaction. There is an inverse relationship between safety and percentage yield, as the percentage yield increases safety generally goes down and vice versa.

Safety And Security:

The safety and security of the capital deployed in an investment is an important factor which needs to be taken into consideration. Investments which primarily fulfill the safety objective yield lesser returns.

Liquidity:

Liquidy refers to the ability to convert an investment quickly into cash. Liquid investments generally offer a lower rate of return as they are characterised by a short term approach and can be easily converted into cash.

Hedge Against Inflation:

Inflation refers to the rate at which the prices of goods and services within an economy rise. Potential investments must generate a rate of return (ROI) which is significantly higher than the rate of inflation prevalent within the economy to beat inflation. An ideal investment is one whereby, the returns provided are greater than the inflation rate which is, inturn, the ultimate economic objective of the investor.

Tax Shield:

• Income tax is levied by the central government under entry 82 of the Union of Schedule Vll to constitution of India. This entry deals with, tax on income other than agricultural income.
• Section 4, which is the charging section, provides that Income Tax is the tax on the total income of a person called the assesse of the previous year relevant to the assessment year at the rates prescribed in the relevant Finance Act.
• Tax is the primary source of public revenue, major part of revenue income is generated from tax by the Central Government. It is a compulsory duty imposed by the government. If any individual refuses to comply with tax payments, he can be punished.
• Tax is a duty of every citizen and not a penalty.The payment of tax involves some understanding and sacrifice on the part of a tax payer.
• Many investments offer the benefit of tax exemptions and deductions. Various government issued securities or ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund that invests in equities and offer tax benefits. ELSS funds are also known as tax-saving funds. 

Objectives of Investment:

• When a person saves much more than he or she spends there is surplus money. When the money saved, it is kept in the form of cash and will be readily available for use at any point of time but the money kept as cash remains intact and does not grow as the money has not been put to use.
• There is a principle called as money makes money.
• A person who has surplus money, invests the same in some assets with a view to generate some significant return. In today’s world there are various type of assets available for investment objective with different risk reward ratios, characteristics and the investor will choose the assets which offer high returns for the level of risks he/she is prepared for.
• In this global fast paced era, investors are presented with ample of investment options like investment into the capital markets, equity segment, debenture segment, making investments in the form of venture capital investments, real estate, purchasing of gold bonds, Government/corporate bonds, etc. Each and every investment here has its pros and cons and carry different risk reward ratios.

Primary objectives:

The options for making potential investments are continuously in an increasing upward fashion yet every single investment vehicle can be categorised according to three fundamental types of investment. The main components of investment are safety, income and growth of capital.

Safety of Capital:

• The primary objective is to make sure that the capital invested is safe. Perhaps there is a saying that there is no such thing as a completely safe and secure investment, nevertheless, we should try our level best for the ultimate safety and protection of our capital funds through the purchase of government issued securities or through the purchase of highest quality of corporate bonds issued by companies. Investment in high creditworthy companies will be a great option when it comes to safeguarding the capital and at the same time generating significant returns on the same. Safe securities are obviously the best means of preserving principal while receiving a reasonable rate of return.
• The best safe investments are usually in the money market which primarily include securities as treasury bills (T bills), certificate of deposits (CD), commercial papers, the fixed income bonds, Government bonds and corporate bonds. These above mentioned securities rank in an order of increasing risk and return significantly increasing the potential yield.

Income:

• While making any investment the primary objective behind this action is income generation. One saves money and invests the same in order to keep up with the prevalent inflation rates and generate significant returns by using the capital.
• The safety investments are also the once that are likely to have the lowest rate of income yield or return.
• Potential investors must take into account the inevitable sacrifice of certain degree of safety if they truly want to increase their returns. Risk is such a component which practically follows each and every business transaction. There is an inverse relationship between safety and percentage yield, as the percentage yield increases safety generally goes down and vice versa.
• When a potential investor is willing to increase their rate of investment returns and take up further risk than that of the money market instruments or the Government securities, such investors can choose to purchase corporate bonds with lower investment ratings. Investment grade bonds rated at A or AA are slightly risker than the AAA bonds but at the same time offer a significant higher percentage income yield than the AAA bonds.
• Most investors, even the most conservative minded ones, at some point, want some level of income generation in their portfolios even if it’s just to keep up with the economy’s rate of inflation and generate a significant higher rate of return.

Growth of Capital:

• Growth of capital is most closely associated with the purchase of common stock particularly growth securities, which offer significant returns and a considerable opportunity for appreciation in the value of the capital.
• Bluechip stocks can potentially offer the best of the world’s by possessing reasonable safety, modest income and potential for growth in the capital invested by long term increase in corporate revenues and earnings as the company matures.
• By investing in bluechip companies and ultimately owning a certain proportion of ownership in the company helps investors to generate return on a regular basis by the way of dividends and at the same time as the company keeps growing fundamentally in terms of its business, the shareholders definitely get their shares in the profits of the company which further leads to capital appreciation in the long run.
• The only limiting factor here is, it does definitely workout in the long run but there is a significant risk associated as the global markets are dependent on various global and economic transactions and significantly impact companies and stock exchanges. There can be unforeseen and unpredictable situations within the business ecosystem which leads to an impact on the companies and inturn, the stock exchanges.

Secondary Objectives:

Effective Tax Planning:

An investor may pursue certain investments in order to adopt tax minimisation or as a part of his or her investment strategy. Tax planning is a method of availing certain tax exemptions and deductions through a legal procedure. A highly paid executive wants to make investments with a favourable tax treatment in order to lesser his or her overall income tax burden.

Maintaining Liquidity:

Liquidity in Economics refers to the process of quickly converting an investment into cash. In other words, it refers to an investment which is available immediately in the form of cash. Liquidity means that the potential investment is easily realisable, saleable or marketable.

Marketability:

Marketability in the business world refers to buying and selling of securities in the market. It refers to the transferability or saleability of an asset. The companies’ securities which are primarily listed in the stock exchanges are much more marketable than the ones which are not. Public limited companies’ shares are more easily transferable than those of private limited companies.