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Investment Process

Many people enjoy investing to earn extra income, but do we really understand the steps involved in making our investments successful? The investment process is a systematic approach that helps investors manage their portfolios, explore investment options, and analyze their investments. ...Read More

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Investment Process

Most Important Steps of Investment Process

Most Important Steps of Investment Process
June 03, 2024
Table of Content

 

What is Investment Process?

The investment decision-making process takes a structural approach to allocating and managing your invested funds across investment instruments like stock, bonds, gold, etc. The investment process involves asset allocation and diversification, assessing risk factors, and establishing goals while monitoring and developing a conducive investment strategy. 

Life insurance policies play a crucial role in this process by providing financial security and risk management. Including life insurance in your investment portfolio ensures that your family's financial future is protected, adding an extra layer of security to your overall financial plan. ULIPs (Unit Linked Insurance Plans) can provide you with the combined benefits of life insurance coverage and market returns.

Overall, the investment process helps you diversify your portfolio, and helps investors enhance their financial decision-making. It also ensures the financial objectives & outcomes are met with confidence.

Why is the Investment Process Important?

The investment process is important because it allows the investors to make higher returns and minimise the risks involved. It acts as an essential part of financial planning that can include short or long-term financial goals like creating wealth for children, building a corpus for their higher studies, getting a life insurance policy for your kids, daughter, buying a car, or retirement planning. 

Moreover, it allows investors to be informed, make systematic decisions and achieve their financial goals.

What is the Investment Decision-Making Process?

The investment decision-making process helps investors determine how much funds to allocate in which financial instrument. It also provides a customised investment strategy for asset diversification, allocation and end-to-end portfolio management process. 

Here are a few key points to consider for a constructive investment decision-making process:

  • What is your investment appetite?
  • What is your time frame for achieving the financial goal?
  • What is the risk appetite you can absorb?
  • Choosing and diversifying the correct set of assets with returns in mind
  • Taxation norms

Understanding the Importance of Investment Process

In this section, we will point out the importance of the investment process and how it can provide investors with financial insights to make informed decisions.

  • Helps Make Well-informed Decisions

    With continuous monitoring, reviewing and analysing, the investment management process gives comprehensive and structural financial information. The information can be related to alleviating investment risks, setting desired financial goals, choosing the right investment plan, giving an outline for investment strategies, and assisting in the diversification of assets and allocation techniques. This overall information can be used to make informed decisions and help in the evaluation of the financial goals.

  • Ensures Effective Risk Management

    In the financial market, fluctuations are bound to happen. Every investor should have an adequate appetite to absorb such financial risks. Effectively assessing your risks and managing them according to your capability is important.

    The investment process allows you to gauge your financial risk type, such as low-risk taker, higher-risk taker, or aggressive risk-taker. Effective risk management helps avoid market uncertainties and withhold any fluctuations physically, mentally, and emotionally.

  • Ensures Alignment with Goals

    Without setting financial goals and objectives, your investment journey holds no value. It is significant to align your financial goals with your financial requirements. For example, say you want to invest in buying a new house. For this, you will need to align your investment capacity and time period and create a roadmap to achieving your financial aspirations with confidence. Remember, your investment goals can be short or long-term.

  • Ensures Flexibility to Adjust to Market Changes

    As already mentioned, financial markets are subject to constant fluctuations and changes. Those investors who are well informed on economic conditions, recent market ups/downs, technological changes or any policy changes happen to adjust better to these market changes. With the present financial situation evaluation, the investment process helps investors keep their investments flexible & adjustable.

    Keep in mind that uncertain investment scenarios and personal situations can change anytime. You will need to be flexible to reassess the financial goals and strategies.

  • Builds Confidence in Making Investment Decisions

    When an investor understands the entire investment process well, he/she can make a good financial strategy and invest with confidence and full assurance. In the financial world, making quick and impulsive decisions can drastically backfire. It is better to gauge the market conditions and invest steadily to adapt to any market uncertainties with a stable mindset.

  • Assists in Protecting and Enhancing Wealth

    It is not wise to invest solely for returns. You must assess your investment risks as well. This will help you protect and enhance your wealth in a systematic manner. It is also essential to track and manage portfolio while keeping in mind your asset allocations.

Most Important Investment Process Steps

Here are some of the basic steps of the investment process that every investor must know and try to follow:

  • Step 1- Establishing Financial Objectives

    Establishing clear financial objectives and goals is a must for a successful financial investment journey. You must prioritise your short-term or long-term financial goals, such as buying a car or having a retirement plan. This lends the right direction and purpose to your investments, ensuring that every financial decision aligns with your broader financial objectives.

  • Step 2 - Evaluating Your Risk Tolerance

    In the financial market, it is crucial to assess your risk tolerance in case of market volatility, fluctuations, or even personal uncertainties. Understanding your risk appetite paves the way for sensible financial decision-making. Moreover, your investment process should align with the kind of investor you are and your risk appetite. For example, you could be a low, high or aggressive risk taker. You should plan your financial roadmap accordingly.

  • Step 3 - Making a Budget & Setting Up an Emergency Fund

    This is one of the most crucial steps of an investment process. As we all know, financial markets are subject to fluctuations and changes. To keep safe from these market uncertainties, it is necessary to set up an emergency fund with a constructive budget in mind. A good budgeting habit helps investors track their income and expenses while ensuring added funds for future investment plans.

    By setting up an emergency fund, you can safeguard investments from unexpected situations like economic crises, medical emergencies, personal upheaval, job loss, and more. With an emergency fund, you get the much-needed financial stability and can ensure that your investments are not interrupted.

  • Step 4 - Diversify Your Investment Portfolio

    Diversification helps create a successful investment portfolio. When you diversify your investments, you are basically widening your investment opportunities through different financial instruments, and at the same time, you are distributing the risk. A diversified investment helps minimise financial risk or portfolio devaluation.

    For example, suppose you have invested in mutual funds, but they are underperforming, and their value has gone down. On the other hand, your investment in bonds is giving you better returns. In this case, one investment downfall is stabilised by the other good-performing investment instrument. By diversifying your investment process, you are steadily growing and inching towards your desired financial goal.

  • Step 5 - Doing Research and Analysis

    In a financial market, experts always recommend that investors do deep research and analysis about their investment opportunities. By doing so, investors can make an informed decision that aligns with their financial objectives. Research helps investors understand market conditions, risks, and other financial parameters.

    Moreover, investors should always do prior research and analysis before choosing their investment instruments. Investors can understand the key metrics to know a brand value, do a constructive market research analysis and quantitative study on growth margins, risk margins and so forth.

  • Step 6 - Making Wise Investment Decisions

    Ongoing tracking, monitoring and reviewing your investment options is the cornerstone to achieving your financial goal. The investment process is all about making wise and informed decisions through financial insights and metrics.

    Apart from analysing and monitoring investments yourself, you can always take the advice of financial experts. They can provide you with crucial and personalised insights on investment opportunities, taxation conditions and future market anticipations. These insights can significantly improve your investment strategies and develop strong financial planning.

  • Step 7 - Regularly Checking and Adjusting the Portfolio

    The last step of the investment process involves continuously checking and adjusting your investment portfolio. This is because constant reviewing of portfolios helps in assessing their performance and one’s financial objectives. With this, you can easily re-adjust, reassess and rebalance your asset allocation and minimise risks, maximising returns. For example, sudden hospital expenses can necessitate portfolio changes and new approaches. Regular evaluation of investment goals is essential to a healthy portfolio.

    Moreover, responding and adapting to these uncertainties can help you meet your financial goals. This investment management process ensures your portfolios remain relevant and aligned with your desired goals for a strong financial future. Remember, regularly checking and adjusting your portfolios will not only protect investments from market volatility but also optimise your investment potential.

Typical Investment Mistakes

Let us now understand the typical investment mistakes.

  • Disregarding Risk Tolerance

    It is always recommended to choose investment options that align with your risk tolerance level. Each individual has a different risk appetite. Investing in the wrong instruments and against your risk tolerance can invite loss, stress and minimal growth.

  • Not Having a Diversified Portfolio

    As discussed earlier, investing in a single financial instrument can increase your chances of risk and loss due to market fluctuations or uncertainties. A diversified portfolio can minimise these risks and uncertainties by putting your funds across different financial instruments.

  • Impatience

    Impatience and impulsive behaviour towards your investment can invite loss and bad decisions. In an investment market, having prolonged patience is the key to reaching your financial goals successfully.

Summary

It is clear by now that the investment process is a wholesome financial roadmap. It requires you to be careful while planning your investment options, keeping a disciplined and patient outlook, and continuously managing your investments through research and analysis.

To ensure a comprehensive financial plan, consider incorporating life insurance into your investment process. Life insurance not only provides financial protection for your loved ones but also offers investment benefits that can help you achieve your long-term financial goals. Explore HDFC Life’s range of life insurance products to find the right policy for your needs and secure your financial future today.

Moreover, we have also summed up the 7 steps of investment process while giving you ways to track and manage portfolios and tips to avoid typical investment mistakes.

FAQs on the Investment Process

Q. What is investment and its process?

A. By investment, we mean allocating funds to investment instruments like bonds, shares etc to earn income or profit. The process is a guided approach to managing and achieving the financial objectives.

Q. What is the investment process and strategy?

A. The investment process ensures investors minimise their investment risks and make maximum profit through informed decisions by assessing risk tolerance and understanding the market conditions. While investment strategy gives a financial outline for asset allocation and choosing the correct investment options.

Q. Why is investment Important?

A. The investment process involves crucial aspects of financial planning. It gives effective insights and investment strategies to fulfil your short-term and long-term financial goals like buying a car or retirement planning.

Q. How many steps are there in the investment planning process?

A. There are 7 steps in the investment planning process. These are: Establishing financial objectives, evaluating your risk tolerance, Making a budget and setting up an emergency fund, Diversifying your investment portfolio, Doing research and analysis, Making wise investment decisions and regularly checking and adjusting the portfolio.

Q. What are the types of investment?

A. There are various types of investments like stocks, bonds, gold, cash, shares, mutual funds, real estate and exchange-traded funds (ETF).

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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