Investment management is an important topic of retail banking and wealth management, these notes will help you understand the key elements of management, investment banking and other associated topics.

Elements of investment 

Investment objectives include maximizing return and minimizing risk, as well as safety, liquidity, and hedging against inflation, depending on the investor’s risk appetite.

  1. Return: Investments aim to drive return, which can be regular income or capital appreciation. The nature of the investment is the deciding factor of the required return.
  2. Risk: Risk is an important factor in investing, as it affects the expected return of the investment.
  3. Safety: Investors must return their original principal on maturity without any loss in value or hindrance.
  4. Liquidity: Investors can sell their investments in the market without incurring transaction costs, energy, or time.


Management in Investment

  1. Investment management is the process by which experts manage clients’ financial assets and other investments. 
  2. Asset allocation, stock selection, financial statement analysis, monitoring of current investments, portfolio strategy and implementation, as well as financial planning and advisory services are among the services offered. 
  3. Professional managers deal with a variety of securities and financial assets, including bonds, equities, commodities, and real estate. 
  4. Investment management in corporate finance refers to a company’s maintenance, accounting for, and efficient use of its tangible and intangible assets.


Important steps in investment management

  1. Deciding investment goals: Investment goals are set to maximize return and minimize risk, with secondary goals such as regular income, capital gain, tax savings, liquidity and safety of principal.
  2. Analysis of Securities: Fundamental and technical analysis helps investors identify whether securities are underpriced or overpriced, using fundamental and technical analysis.
  3. Construction of portfolio: A portfolio is a blend of securities designed to maximize return and minimize risk, by diversifying funds among different securities of different companies and industries.
  4. Evaluating the performance of the Portfolio: An efficiently managed portfolio calls for evaluation. This step is also called portfolio appraisal. Portfolio appraisal involves the measurement of risk and return of security from time to time and comparing it with expected risk and return.
  5. Revision of portfolio: The investor must redesign the portfolio to improve return by selling less/underperforming securities and buying more profitable ones.

Investment banking

Investment banking is a branch of banking that provides underwriting and M&A advising services to governments, corporations, and institutions, connecting investors with enterprises in need of funding.


Role of investment banking

  1. Capital raising for businesses, governments, and other organisations is the main focus of investment banking. 
  2. It includes underwriting new debt and equity securities, selling securities, and facilitating mergers and acquisitions, reorganizations, and broker trades. 
  3. It also helps corporations, governments, and other groups plan and manage the financial aspects of large projects.

Services offered by full-service investment banks

    1. Underwriting: Capital raising and underwriting groups work between investors and companies to raise money or go public, serving the primary market of new capital.
    2. Mergers and acquisitions: Advisory roles for both buyers and sellers of businesses, managing the M&A process from start to finish.
  • Sales and trades: Sales and trading groups in investment banking act as agents for clients and trade their capital.
  • Equity research: Equity research helps investors make investment decisions and trade stocks.
  1. Asset management: Managing investments for many different types of investors, such as institutions and private investors, in a variety of investing strategies.

Underwriting services in Investment banking

Some of the general underwritings are as follows: 

Underwriting is the process of raising capital by selling stocks or bonds to investors to help businesses operate and grow.

  1. Firm commitment: The underwriter assumes full financial responsibility for any unsold shares.
  2. Rest efforts: The underwriter commits to selling the issue at an agreed-upon price, but can return unsold shares without financial responsibility.
  3. Al-of-none:  The issuing company receives nothing if the issue cannot be sold at the offering price.

The organisational structure of an investment bank 

    1. Front office: Investment Banks generate revenue through three primary divisions: investment banking, sales & trading, and research. Sales and trading involve buying and selling products, while research provides research reports.
    2. Middle office: The middle office is responsible for ensuring the investment bank does not engage in harmful activities. When a firm is raising funds, the front office and middle office communicate to make sure the company is not taking on too much risk.
  • Back office:  Back office provides operations and technology to the front office to make money for an investment bank.

Investment management vs Investment banking

By managing their clients’ money, investment managers assist clients in achieving their investment goals. They can work with equities, bonds, and commodities, and have varied roles and responsibilities.

Investment bankers assist with company finance requirements, such as capital or money-raising. They facilitate complicated financial transactions, such as debt issuance, new securities underwriting, mergers and acquisitions, and initial public offerings (IPOs).

Portfolio management

The practice of choosing and managing investments to achieve long-term financial goals and risk tolerance is known as portfolio management. It involves managing an individual’s investments to maximize profits within the stipulated time frame.

The objective of portfolio management

The goal of portfolio management is to assist investors in choosing the optimal investment options given their income, age, time horizon, and risk tolerance. It includes capital appreciation, maximizing returns, risk optimization, allocating resources optimally, ensuring flexibility and protecting earnings against market risks.

Who should opt for portfolio management?

Portfolio management is important for investors with limited knowledge, limited knowledge about the investment market, and limited time to track and rebalance their investments. People must use tactics that align with their financial plan and prospect in order to maximise the management process.

Key elements under portfolio management

  1. Asset allocation: Asset allocation is essential for effective portfolio management, consisting of stocks, bonds, cash, and alternative investments.
  2. Diversification: Diversification aims to lower volatility while capturing the long-term gains of all asset classes or industries. It involves spreading risk and reward within an asset class or between asset classes.
  3. Rebalancing: Rebalancing is a process used to bring a portfolio back to its initial target allocation on a regular basis, typically once a year. It involves selling high-priced securities and putting that money into lower-priced and out-of-favour securities. When markets push the asset mix out of balance, this is done to restore it.

Understanding the difference between portfolio management and investment management

Portfolio Management and Asset Management require clients to have money to manage, while Investment Banking requires professionals to raise capital to support clients.

Let’s understand this by assuming two different scenarios.

Scenario 1 Scenario 2
In the first scenario, Client A engages Bank B to advise them on where to put their money. “Bank B is advised by Client A to place Client A’s funds in portfolios where Client A believes they would grow more successfully and result in Client A becoming wealthy”. The funds are then used by Bank B to make investments to improve the returns on the portfolios they rely on. This is managing a portfolio. As the portfolio manager, it is your responsibility to oversee the investments and work to increase the wealth of clients who currently have money. Client A in this instance desires an investment in their company. An investment banker will look for investors, explore ways to raise money through debt or the equity market, execute initial public offerings, and offer business clients merger and acquisition advice. Therefore, in this instance, the client lacks funds; investment banking professionals assist the client in obtaining funds through capital-raising alternatives.


Difference b/w portfolio management and wealth management

  1. Portfolio management focuses on investment options while in wealth management financial planning is given much consideration. 

Portfolio management comprises Managing a client’s portfolio of assets like stocks, bonds, mutual funds, ETF commodities and more to yield higher returns. However, wealth management oversees a client’s entire financial situation, including tax preparation, accounting planning, retirement planning, estate planning, and other financial considerations.

  1. The main duty of portfolio management is to manage assets in a way that maximises returns while minimising risk and the duty of wealth management is to fulfil fiduciary duties in a way that maximises client benefit and manages wealth.

Differences between Portfolio Management Services (PMS) and Mutual Funds (MFS).

PMS offers a higher degree of customization tailored specifically to the goals of an investor, while MFs offer customization to the extent of the classification and diversity of the fund. 

While MFs just offer data sheets as the extent of their connection with investors, PMS is personalised and encourages conversation between the portfolio manager and investor.

For the admission and departure of investments as well as yearly maintenance costs, MFs incur a predetermined fee. PMS demands a share in the profit over a particular rate of return in addition to the annual maintenance fee.

Asset ownership is retained by the investor, while MFs offer units in the form of investment. Investment size is limited to Rs. 50/- Lakh as per SEBI guidelines.

Portfolio management steps

  1. Identification of objectives
  2. Estimating the capital market
  3. Decisions about asset allocation
  4. Formulating suitable portfolio strategies
  5. Selection of profitable investments and securities
  6. Implementing portfolio
  7. Evaluating and revising the portfolio
  8. Rebalancing the composition of the portfolio

Disadvantages of portfolio management

PMS houses require a minimum capital investment of INR 50/- lac to start investing, making it difficult for investors from lower income profiles. Asset management fees vary between 2-2.5%, and there is no performance guarantee. PMS houses are a party to profits but not to losses, and the risk involved in investing in financial markets is higher.

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