Key Objectives Of Investment Management Strategies

Investment management is the process of determining the optimal portfolio mix for a client. An investor's financial goals, risk tolerance, and time horizon are all factors that help determine their investment objectives. These objectives are then used as a strategic guide for selecting assets.

The four main investment objectives are:

1. Growth: This involves investing in assets that have the potential for high returns but may come with higher risk.

2. Income: This approach focuses on generating a steady stream of income through investments that provide regular returns, such as dividends or interest.

3. Trading: This strategy involves profiting from short-term price movements in the market and can include complex strategies like short-selling and options trading.

4. Combination of Growth and Income: This approach aims to balance the potential for high returns with the need for a steady income stream.

It's important to note that investment objectives can change over time as an individual's life circumstances, financial goals, and risk tolerance evolve.

Safety and security

One way to achieve this is by investing in stable economic systems, such as government-issued securities. U.S. bonds, for example, are considered the gold standard in safety, as they are backed by the full faith and credit of the U.S. government. Similarly, AAA-rated corporate bonds are issued by large, stable companies and are another safe option for investors. These securities are an excellent way to preserve capital while earning a pre-set rate of interest.

Another avenue for safety-conscious investors is the money market, which includes Treasury bills, certificates of deposit, commercial paper, and bankers' acceptance slips. However, it's important to remember that safety often comes at the cost of more modest returns compared to riskier investments. This is known as "opportunity risk."

When it comes to security, the term "security" itself refers to a broad array of investments, such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts. Securities are fungible and tradable financial instruments used to raise capital in public and private markets. They can be categorised into three main types: equity, debt, and hybrids. Equity securities provide ownership rights, debt securities involve loans that must be repaid with interest, and hybrids combine elements of both equity and debt.

In addition to the type of security, investors should also consider the level of risk associated with their investments. A careful analysis of market conditions, currency and interest rate fluctuations, and political changes can help mitigate risks. Diversification of one's investment portfolio is also key to minimising potential losses. By not putting "all your eggs in one basket," investors can reduce the volatility risk associated with a particular asset.

Income and wealth accumulation

Income investors may buy fixed-income assets such as government-issued bonds, corporate bonds, and money market instruments like treasury bills and certificates of deposit. These are considered safe investments with modest returns.

Investors seeking higher returns may opt for stocks that have a good record of dividend payments. Additionally, certain plans such as insurance savings plans and retirement plans offer a wealth accumulation component. These plans provide the benefit of life cover while also offering monthly income, which can be received immediately or on maturity.

Wealth accumulation is often coupled with capital gains, which are achieved by selling an asset. This can include selling shares of a company, real estate, gold, or other assets.

It's important to note that the objectives of income and wealth accumulation may change over time as an investor's life circumstances and needs evolve. Therefore, the investment strategy should be periodically reassessed to ensure it remains aligned with the investor's goals.

Capital gains

There are several types of investments that can lead to capital gains, such as stocks, real estate, gold, and diamonds. Each of these carries a significant amount of risk. Blue-chip stocks, for example, provide modest income in the form of dividends while also offering the potential for capital gains over time. Growth stocks, on the other hand, are more volatile and riskier but can provide greater returns.

Mutual funds and exchange-traded funds (ETFs) are other instruments that can help achieve capital gains. ETFs, in particular, mirror a benchmark index, exemplifying passive management with minimal intervention from human fund managers.

Life insurance products, such as unit-linked insurance plans (ULIPs), can also enable investors to create wealth over the long term while providing security for their loved ones. ULIPs combine life insurance and investment, allowing investors to earn market-linked returns.

It is worth noting that capital gains are usually taxed at favourable rates if the asset is held for at least a year. These are classified as long-term gains and are typically taxed at rates of 0%, 15%, or 20%.

Overall, capital gains are an important objective of investment management, offering the potential for significant profits while carrying varying levels of risk.

Liquidity

When it comes to liquidity, different investments have different characteristics. Some investments, like bonds and life insurance savings plans, are considered liquid assets. These can be quickly sold or traded to meet immediate financial requirements. On the other hand, investments such as real estate and art are considered illiquid, as they cannot be easily converted into cash without losing value.

The level of liquidity an investor desires depends on their financial goals and risk tolerance. For example, a conservative investor with a low-risk tolerance may prefer more liquid investments to ensure they can access their funds whenever needed. In contrast, an investor with a higher-risk tolerance may be comfortable with less liquid investments if they offer the potential for higher returns.

Additionally, the liquidity of an investment can change over time. For instance, an investment that is usually liquid, such as stocks, may become difficult to sell at a desirable price during a market downturn. Therefore, investment managers need to carefully consider the liquidity of different investments when constructing a portfolio that aligns with their client's goals and risk tolerance.

Overall, liquidity plays a vital role in investment management by providing investors with the flexibility to access their funds when needed and influencing the potential returns and risks associated with different investment choices.

Tax minimisation

There are several ways to reduce tax liability through investment. Firstly, investors can choose to put their money into tax-section 80C-advantaged investments such as life insurance plans, retirement plans, and national pension funds. These are eligible for deductions, reducing the overall tax burden. Secondly, investors can benefit from the more favourable long-term capital gains tax rates. If an investor holds an asset for just one day longer than a year, they will benefit from a lower tax rate on their gains. This is a simple yet effective strategy for reducing tax liability.

Another way to minimise tax is to invest in assets that provide a tax-free return at maturity. For example, certain investments such as life insurance plans, unit-linked insurance plans (ULIPs), public provident funds (PPF), and equity-linked savings schemes (ELSS) are exempt from tax at maturity. This can result in significant savings for the investor.

Finally, investors can also reduce their tax burden by investing in assets that offer indexation benefits on capital gains. This is available to those who hold equity mutual funds, gold ETFs, and debt mutual funds for a long enough period.

By carefully considering the tax implications of their investments, investors can reduce their tax liability and maximise their overall returns.

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