The 6-Step Investment Decision Process : A Blueprint for Smart Investing

Whoever says money can’t buy happiness probably hasn’t experienced the realities of being a Millennial or Gen Z. With the skyrocketing cost of living and income disparities in the past 30 years, Indians are realizing the importance of saving money. 

But stashing your cash in a bank account or a piggy bank won’t protect it from the effects of inflation. That’s where a solid investment decision process comes into play.

In this blog, we’ll take you through a practical Investment Decision Process that will help you build a strong investment portfolio. By following these steps, you can pave the way to financial growth and security. 

So, let’s dive in and learn how to make your money work for you! We will also explore the world of capital investments and its various types.

What Is the Investment Decision Process?

The investment decision process is similar to any other decision-making process. It involves having a structured plan and following a step-by-step approach to fuel your financial growth within your desired investment fund. 

This process includes setting both short-term and long-term goals and assessing the level of risk you’re comfortable taking to achieve those goals. The duration of your goals also affects how long you should hold onto your investments.

Understanding the entire investment decision process helps you make better decisions and ensures you’re on the right track. In this article, we’ll explore the six essential steps of the investment process that can lead to more stable returns in the long run. 

So, let’s dive in and learn how to make informed investment decisions for your financial growth.

6 steps of investment decision process 1.Catagorizing  financial goal 2.Establishing the Holding Period 3.Estimating Expected rate of return 4.Identifying Risk tolerance  5.Creating Diversifying portfolio 6.Tracking managing and rebalancing the portfolio

1. Categorizing Financial Goals

When it comes to the investment decision process, it’s important to move beyond simply deciding on your goals. Categorizing them into short-term and long-term objectives can significantly streamline the process and enable a more calculated approach. Here are some examples of short-term and long-term goals:

Short-Term Goals:

These goals typically span a timeframe of 5-10 years. Examples include purchasing a car, going on a vacation, furthering your education, or starting/expanding a business. Achieving these goals often requires a substantial amount of capital.

Long-Term Goals:

Long-term goals extend over a horizon of 10-25 years. They encompass aspirations like owning a home, funding your child’s education, and planning for retirement. These objectives necessitate careful planning and a sustained, long-term investment strategy.

By categorizing your goals, you can better align your investment strategies with each category. This will help you move forward easily with the next steps.

2. Establishing the Holding Period

When it comes to your investment goals, the holding period plays a decisive role. For short-term goals with a timeframe of less than 10 years, it’s necessary to allocate a large portion of your investment fund within that period. As it has a comparatively shorter timeline to grow. 

On the other hand, when your goals have a longer timeline, you can take advantage of compound interest. By allowing your investments to grow multifold over time, you not only earn stable returns but also build a huge corpus to fulfill those long-term objectives.

3. Estimating the Expected Rate of Return

The expected rate of return is a measure of the potential profit or loss that an investor can anticipate from an investment. For instance, if you invest ₹100,000 with the goal of earning a profit of ₹25,000 over a 2-year holding period, the estimated rate of return would be approximately 12%. This estimation provides insight into the potential returns on your investment and helps inform your decision-making process regarding your financial goals.

4. Identifying Risk Tolerance 

Your risk appetite, or risk tolerance is often influenced by the level of expected returns on your investment. In simple terms, if you desire higher returns, you must be willing to increase your risk appetite by investing in volatile asset classes. 

On the other hand, if the expected rate of return is low, there is always the option to invest in more secure and fixed investments such as government bonds or fixed-interest savings accounts.

5. Creating a Diversified Portfolio:

Once you’ve categorized your goals, holding periods, expected returns, and assessed risks, it’s time to build a diversified portfolio. This means matching the expected rate of return and risk for each goal. Since risk and return vary across goals, it’s important to include a mix of different asset classes in your portfolio. 

Consider high-risk, high-return options like stocks and real estate, fixed interest investments like PPF and government bonds for stability, and moderate-risk options like mutual funds and ETFs.

By diversifying your portfolio, you spread risk and increase the potential for consistent returns. Regular monitoring and rebalancing are essential to align your portfolio with changing market conditions and financial goals. 

Creating a diversified portfolio also includes adding sustainable investments like SustVest to combine financial returns in a futuristic investment avenue and climate-focused returns.

6. Tracking Managing and Rebalancing the Portfolio

Your investment decision process doesn’t end with creating portfolio. The last yet important step is to track  and review the investment performance at regular intervals.

You also need to keep a watch on market fluctuations and trends to rebalance the portfolio by changing the allocation of assets. By regularly reviewing and analyzing the performance of your invested assets, being mindful of market fluctuations, you can take steps to avoid negative returns. 

One way to achieve this is by rebalancing your portfolio and adjusting the allocation of assets. You can rely on your own expertise or seek guidance from a financial advisor. 

Regularly reviewing and analyzing your investments helps keep your portfolio in line with your goals and adaptable to market changes, maximizing your investment potential.

Investment Decision Process of Corporate: Capital Investment

We talked about how individual or retail investors go through the investment decision process. Now, let’s shift our focus to how corporations approach capital investment.

In corporate capital investment, the investment decision process is crucial. It involves evaluating opportunities, assessing risks and returns, setting goals, and considering factors like cash flow and market conditions. This helps corporations make informed choices to optimize their investments and drive growth.

What Is Capital Investment?

Capital investment in businesses and industries entails investing in key areas such as technology, machinery, and infrastructure. Capital investment focuses on tangible assets and resources that directly contribute to a company’s growth and profitability.

By strategically allocating funds to enhance technology, acquire advanced machinery, or develop necessary infrastructure, businesses aim to improve operational efficiency, increase productivity, and drive higher profits. 

These investments are made with a long-term perspective, as they require time to generate substantial returns and contribute to sustained financial growth.

What Are the types of Capital Investments?

A finance manager, when in need, has to invest in different types of capital investments 

Physical Capital Investment

In this type of capital investment, if the company needs to sustain itself for a longer period, physical capital investment becomes inevitable. This involves improving infrastructure, productivity through new machines, technology, or employee training. 

Such expenses can result in a greater return on investment if executed properly. During times of expansion and to survive fierce competition, these costs are necessary. For example, purchasing a plot for business serves as a physical investment that can lead to real estate capital appreciation in the future and save on rental costs.

Financial Capital Investment

Financial capital investment involves allocating funds into different financial assets to generate returns and grow wealth. Financial managers make these investments based on opportunities and market conditions. 

This includes investing in stocks, bonds, mutual funds, ETFs, and other financial instruments. The goal is to maximize returns, manage risk, and improve overall financial performance.

Why are Both Type of Capital Investment Is Necessary for a Company?

Both physical capital investment and financial capital investment are necessary for a company. Physical capital investment improves infrastructure and productivity, ensuring long-term sustainability and cost savings. 

Financial capital investment diversifies the investment portfolio, generates growth and income, and builds reserves for future opportunities. By combining these types of investments, companies optimize their resources, manage risk, and enhance overall financial performance.

Final Thoughts

One valuable lesson from corporate investment planning is the systematic approach they take in considering risk, timeliness, and accurate calculation of returns. It emphasizes the importance of not blindly chasing returns but instead focusing on the investment decision process itself. 

This process allows for adjustments and revisions as needed, ensuring a comprehensive evaluation of different investment options. Relying solely on returns can lead to a narrow perspective and favoritism towards specific instruments. 

Therefore, it is crucial to prioritize the overall process and consider various factors in making investment decisions for long-term success. Check out SustVest today and take great investment decisions ahead.