Тема 3. Процес управління інвестиціями

3. Investment management process as a five-step procedure. Setting of investment policy

Investment management process is the process of managing money or funds.

The investment management process describes how an investor should go about making decisions.

Investment management process can be disclosed by five-step procedure, which includes following stages:

1. Setting of investment policy.

2. Analysis and evaluation of investment vehicles.

3. Formation of diversified investment portfolio.

4. Portfolio revision

5. Measurement and evaluation of portfolio performance.

Setting of investment policy is the first and very important step in investment management process.

Investment policy includes setting of investment objectives. The investment policy should have the specific objectives regarding the investment return requirement and risk tolerance of the investor.

For example, the investment policy may define that the target of the investment average return should be 15 % and should avoid more than 10 % losses. Identifying investor’s tolerance for risk is the most important objective, because it is obvious that every investor would like to earn the highest return possible. But because there is a positive relationship between risk and return, it is not appropriate for an investor to set his/ her investment objectives as just “to make a lot of money”. Investment objectives should be stated in terms of both risk and return.

The investment policy should also state other important constrains which could influence the investment management. Constrains can include any liquidity needs for the investor, projected investment horizon, as well as 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 today 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 investor must assess the level of risk he /she should take and to decide if it is relevant for him or not. The investment policy can 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, investment horizon and tax status of the investor.

Various financial assets by nature may be more or less risky and in general their ability to earn returns differs from one type to the other