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What are the stages in investment process?


Any investment process has to go through 5 stages –

Stage 1. Selecting the Investment style / policy

Stage 2. Carrying out Investment analysis

Stage 3. Conducting a Valuation process

Stage 4. Selecting Right mix of investments

Stage 5. Review of investments.

Investment style / policy

This stage involves taking decisions. It involves finding answers to the following questions.

  • What’s the risk you’re willing to take? Risk and returns are closely related. The more risk you’re willing to take, the more returns you’d expect.
  • Where do you stand – are you a moderate risk taker or a heavy gambler? Or are you a really risk averse person?
  • How much money can you set aside to invest?
  • With the money you have, what are the assets in which you can invest?
  • How much time can you wait for your investments to grow?
  • What are your financial objectives? Do you think that you will be able to achieve your objectives with the money you have decided to invest? If yes, have you arrived at that decision by calculating the returns at a reasonable rate?
  • If your answer to the above question is ‘no’, how would you strike a balance? Will you bring down your financial goals by cutting off certain goals or would you try to increase your investable fund?
  • If you decide to invest in different assets like shares, real estate, gold etc.. How much are you willing to allocate to each type of assets and why?
  • Would you like your investments to be actively managed? That is, would you like to utilize the services of investments experts who would do their best to extract maximum gains for you using their expertise and experience? Are you willing to pay for their services?
  • If you’ve decided to take the stock market route, would you adopt a growth investment strategy or a value investing strategy? Or would you try to strike a balance in between? Whatever may be the style you adopt, would you prefer to invest in a mix large caps, mid caps and small caps or would you like to stick with one category?

Finding answers to the above questions would reveal your preferred investment style.

Investment analysis

A Comparative analysis of your chosen mix of investments. This would help you to decide whether the mix is optimal to achieve your goals.

At the base level it includes the analysis of your chosen investment asset – equity, debentures, bonds, commodities, real estate etc..

Broader level analysis would include analysis of the economy and industry, qualitative and historical analysis.

Investment valuation

This is the most important part of investment. Valuation is the process of estimating what the assets is actually worth. Valuation can be done for all assets. It is an attempt to determine the ‘reasonable price’ at which an asset can be bought so that it increases in value over a period of time. It is quite different from the ‘market price’ which is what a willing and able buyer is prepared to pay.

For example – if a builder offers an apartment for 65 lakhs, would you blindly buy it without analyzing the builder’s track record and the facilities offered? Won’t you try to find out why he charges 65 lakhs for that apartment? Finally you would buy that apartment only if you find it attractive at that price. It is an individual decision after considering all the factors.

The same process needs to be done in any form of investment – whether it’s shares or mutual funds or commodities. You have to make sure that the asset you get is worth the money you spend.

Mixing the various options

Putting all the eggs in one basket is not a good idea. There are some people who think that putting it all in one is better since they can concentrate on it and escape from the trouble of carrying multiple baskets at the same time. That’s a very wrong approach in investments and it needs to be corrected.

For example – if you put your money in real estate alone, should the real estate prices crash, you’re locked up with no other options. Instead, if you had your money diversified in stocks, gold, real estate etc you’d be better off since when your money goes down  in some, you gain in another and thereby reduce the risk of losing all your money.

Deciding the right mix is technically called ‘portfolio’ and managing it to achieve maximum results- in terms of risk reduction, capital preservation and returns is called ‘portfolio management’.

Once you have invested your funds, there is one more job left. That is , periodic review of your investments. All investment may not be yielding good returns. Some may prove to be duds and hence, rebalancing of investments may be required to meet your goals. Reviewing your investments periodically would reveal which investment is performing and which one is not.


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