JAIIB RBWM Paper-4 Module-D Unit 2: Investment Management

JAIIB Paper 4 (RBWM) Module D Unit 2: Investment Management (New Syllabus) 

The Institute of Indian Banking and Finance (IIBF) has recently announced the new syllabus and exam pattern for the JAIIB Exam 2023. Similar to the current format, JAIIB 2023 will consist of four papers. One of the important topics covered in Paper 4 (Retail Banking and Wealth Management) is “Investment Management,” which is a crucial unit that every candidate must grasp thoroughly. To ensure that aspirants have a better understanding of the topic, we will provide all the necessary details related to Unit 2: Investment Management of JAIIB Paper 4 (RBWM) Module D Wealth Management. We strongly recommend that candidates refer to this article and utilize our Online Mock Test Series to enhance their knowledge of Investment Management.

It is imperative for JAIIB Certification Examination 2023 candidates to comprehend each unit included in the syllabus, particularly the Marketing unit, which plays a significant role in the banking industry. Hence, candidates must prepare well to excel in the exam and build a successful career in the banking sector.

Investment Management

All of us whether individuals or organizations earn money by different economic activities and spend it for satisfying our wants. Sometimes, Income of people is more than their expenditure and other times, their expenditure on goods and services is more than income, these differences  result into saving and borrowing of money respectively. When income is more than consumption people incline to save (surplus money).

It can be understood in the form of equation also.

Saving = Income – expenditure.

Element Of Investment

The characteristics or elements of investment can be understood in terms of return, risk, safety and liquidity.

  • Return: The prime objective of any type of investment is to drive return. The expected return may be regular income (interest, dividend, rent, etc.) or increase in the value of investment/ capital appreciation, i.e. difference between the selling price and buying price of assets. The nature of investment (risky, less risky, non- risky) is the deciding factor of required return from it.
  • Risk: Risk is the basic attribute of investment. Risk means variability in return because of loss of capital or non-payment of income what so ever reason. More the risk, normally more is the expected return and vice versa.
  • Safety: Safety rule of investment states that investors get back their original principal on maturity with no loss in value and hindrance. Liquidity: It means an investor can sell his investment in market as need arise without incurring much transaction costs, less energy and time.
  • Objectives of Investment: The basic objectives of any investment is maximizing the return and minimizing the risk. In addition to the basic objectives other objectives of investment are safety, liquidity, hedging against the inflation etc.

Basics Of Investment Management

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

In short, Investment management may be summarized as follows: 

  • Investment management refers to the handling of financial assets and other investments by professionals for clients.
  • Clients of investment managers can be either individual or institutional investors.
  • Investment management includes devising strategies and executing trades within a financial portfolio.

Steps In Investment Management

  • Deciding investment goals
  • Analysis of Securities
  • Construction of portfolio
  • Evaluating performance of Portfolio
  • Revision of portfolio

Investment Banking

Investment banking is a specific division of banking or financial institution that serves Governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses).

Role of Investment Banking 

  • Investment banking deals primarily with the creation of capital for other companies, governments, and other entities.
  • Investment banking activities include underwriting new debt and equity securities for all types of corporations, aiding in the sale of securities, and helping to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors.
  • Investment bankers help corporations, governments, and other groups plan and manage the financial aspects of large projects.
  • Broadly speaking, investment banks assist in large, complicated financial transactions. They may provide advice on how much a company is worth and how best to structure a deal if the investment banker’s client is considering an acquisition, merger, or sale.

Services Being Offered By Full-Service Investment Banks 

Full Service Investment Bank offer the following services: 

  • Underwriting – Capital raising and underwriting groups work between investors and companies that want to raise money or go public via the IPO process. This function serves the primary market or “new capital”.
  • Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of businesses, managing the M&A process start to finish.
  • Sales & Trading – Matching up buyers and sellers of securities in the secondary market. Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital.
  • Equity Research – The equity research group research, or “coverage”, of securities helps investors make investment decisions and supports trading of stocks.
  • Asset Management – Managing investments for a wide range of investors including institutions and individuals, across a wide range of investment styles.

Underwriting Services in Investment Banking 

Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g.,  an initial public offering IPO) on behalf of corporations or other entities.

Firm Commitment – The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.

Best Efforts – Underwriter commits to selling as much of the issue as possible at the agreed upon offering price but can return any unsold sharesto the issuer without financial responsibility.

All-or-None – If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.

Once the bank has started marketing the offering, the following book-building steps are taken to price and complete the deal (Book building process):

  • Prospects with price range
  • Institutional investor commitment @firm price
  • Book demand Built
  • Price is set to ensure clearing
  • Allocation

Investment Bank Organizational Structure

Investment banks are split up into three main offices – front office, middle office, and back office.

  • Front Office – The revenue for an Investment Bank is generated by the front office. It consists of three primary divisions: investment banking, sales & trading, and research. Sales and trading department involves Buying and selling products. The research department comes up with various research reports on the firms or industry.
  • Middle Office – The main function of the middle office is to ensure that the investment bank doesn’t engage in activities that can be detrimental to the bank’s health. It includes functions like risk management, financial control, corporate treasury, corporate strategy, and compliance.
  • Back Office – Back office basically provides supporting activities like operations and technology to the front office so that it can do the jobs needed to make money for the investment bank.

Investment Management Vs Investment Banking

Investment managers help clients reach their investment goals by managing their money. Clients of investment managers can include individual investors as well as institutional investors such as educational institutions, insurance companies, pension funds, retirement plans, and governments.  Investment managers can work with equities, bonds, and commodities, including precious metals like gold and silver.  Investment managers can have varied roles and responsibilities, depending on the firm, which can include:

  • Financial statement analysis
  • Portfolio allocation such as a proper mix of bonds and stocks
  • Equity research and buy and sell recommendations
  • Financial planning and advising
  • Estate and retirement planning as well as asset distribution

Investment bankers help with corporate finance needs, such as raising funds or capital. Companies and governments hire investment bankers to facilitate complicated financial transactions, including:

  • Debt issuance such as a bond offering
  • New securities underwriting
  • Mergers and acquisitions

Initial public offerings (IPOs) Investment banking can involve equity and security research and making buy, sell, and hold recommendations. Investment banking firms are also market makers, which provide liquidity or connect buyers and sellers to “make” the market.

Portfolio Management

What is Portfolio Management

In a layman’s language, the art of managing an individual’s investment is called as portfolio management. Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution. It is managing an individual’s investments in the form of bonds, shares, cash, mutual funds, etc.

Who is a Portfolio Manager? 

An individual who understands the client’s financial needs and designs a suitable investment plan as per his income and risk taking abilities is called a portfolio manager.

Objectives Of Portfolio Management

The fundamental objective of portfolio management is to help select best investment options as per one’s income, age, time horizon and risk appetite.  Some of the core objectives of portfolio management are as follows: 

  • Capital appreciation
  • Maximising returns on investment
  • To improve the overall proficiency of the portfolio
  • Risk optimization
  • Allocating resources optimally
  • Ensuring flexibility of portfolio
  • Protecting earnings against market risks

Who Should Opt for Portfolio Management? 

The following should consider portfolio management: 

  • Investors who intend to invest across different investment avenues like bonds, stocks, funds, commodities, etc. but do not possess enough knowledge about the entire process.
  • Those who have limited knowledge about the investment market.
  • Investors who do not know how market forces influence returns on investment.
  • Investors who do not have enough time to track their investments or rebalance their investment portfolio.

Key Elements of Portfolio Management

  • Asset Allocation
  • Diversification
  • Rebalancing

Portfolio Management Vs Investment Banking

  • Portfolio Management refers to the management of the portfolio of assets of the client whereas, investment banking refers to the various different type of function performed by the investment banker in the economy by offering different financial services to their clients by mainly dealing in the purchase and sale of the stock and helping in raising the capital.
  • Portfolio Management (Asset management) is all about managing clients’ investments whereas Investment Banking is all about raising the capital for clients.
  • So, the basic difference between these two is in case of Portfolio Management or Asset management, clients already have the money which portfolio manager need to manage whereas, in the case of investment banking, clients don’t have the money and investment banking professional need to raise capital to support your clients. Let’s take an example to illustrate the difference between the two.  We will take two scenarios and will try to understand how this works.


In the first scenario, Client A hires Bank B to help them with investing their money in different areas. Client A tells Bank B – “Take my money and invest in portfolios where you think our money will grow better and will make us wealthier.” Bank B then takes the money and invests to get better returns on the portfolios they rely upon. This is portfolio management. In this case, clients have money; your job as a portfolio manager is to manage the investment ad try  to maximize the client’s wealth.


In this scenario, Client A wants someone to invest in their business. An investment banker will search for the investor; look for capital raising opportunities in the equity market or via debt or run IPOs or advises companies on Merger & Acquisition deals. So, in this case, the client doesn’t have money; investment banking professional helps the client get the money via capital  raising opportunities.  In finance parlance, asset management is also known as buy-side and investment banking is termed as sell-side. So, the outlook for these two are different. This is why investment banking needs more inputs as it needs to bring the business whereas portfolio management requires skill and knowledge about investment.

Role of Portfolio managers

Portfolio managers are investment decision-makers. They devise and implement investment strategies and processes to meet client goals and constraints, construct and manage portfolios, make decisions on what and when to buy and sell investments.

Portfolio Management Service Vs Mutual Funds (MFS)

The following attributes distinguish between PMS and MF: 

  • Customization: PMS offers a higher degree of customization tailored specifically to the goals of an investor. Mutual funds, on the other hand, offer customization to the extent of the classification and diversity of the fund.
  • Engagement: PMS is personalized promoting a dialogue between the portfolio manager and investor. An investor can convey any changes in the risk profile or personal situations to maximize returns. MFs offer low engagement with the investor limited to fact sheets. Portfolio managers for PMS are also directly accountable to the investors.
  • Fee structures: MFs charge a fixed fee attributed to the entry and exit of investments as well as annual expenses for maintenance (known as the expense ratio). PMS demands a share in the profit over a particular rate of return (known as hurdle rate) in addition to the annual maintenance fee. The alignment of incentives is highly preferred in the case of PMS so that the portfolio manager takes responsible decisions in an attempt to attain supernormal returns.
  • Asset ownership: Under PMS, the investor retains direct ownership of shares of the company. However, MFs offer units in the form of investment.
  • Investment size: MFs entertain any amount of capital. However, PMS demand a capital investment which must be over the minimum limit of ₹50/- Lakh as per Securities and Exchange Board of India (SEBI) guidelines.

Types Of Portfolio Management Services

  • Active Portfolio Management: The aim of the active portfolio manager is to make better returns than what the market dictates. Those who follow this method of investing are usually contrarian in their approach. Active managers buy stocks when they are undervalued and start selling when they climb above the norm
  • Passive Portfolio Management: At the opposite end of active management comes the passive investing strategy. Those who subscribe to this theory believe in the efficient market hypothesis. The claim is that the fundamentals of a company will always be reflected in the price of the stock. Therefore, the passive manager prefers to dabble in index funds which have a low turnover, but good long-term worth.
  • Discretionary Portfolio Management: A discretionary manager is given full leeway to make decisions for the investor. While the individual goals and time-frame are taken into account, the manager adopts whichever strategy he thinks best.
  • Non-Discretionary Portfolio Management: The non-discretionary manager is simply a financial counselor. He advises the investor in which routes are best to take. While the pros and cons are clearly outlined, it is up to the investor to choose his own path. Only once the manager has been given the go ahead, does he make a move on the investor’s behalf.

Processes of Portfolio Management

Advantages of Portfolio Management

  • Makes Right Investment Choice: Portfolio management is a tool that helps the investor in choosing the right portfolio of assets. It enables in making more informed decisions regarding investment plans in accordance with the goals and objectives.
  • Maximizes Return: Maximizing the return is one of the important roles played by portfolio investment. It provides a structured framework for analyses and selecting the best class of assets. Investors are able to earn high returns with limited funds.
  • Avoids Disaster: Portfolio management avoids the disaster of facing huge risks by investors. It guides in investing among different classes of assets instead of investing only in one type of asset. If an investor invests in only one type of security and supposes it fails, then the investor will suffer huge losses which could be avoided if he might have invested among different assets.
  • Track Performance: Portfolio management helps management in tracking the performance of their portfolio of investments. A consolidated investment held within the portfolio can be evaluated in a better way and any of its failures can be easily detected.
  • Manages Liquidity: Portfolio management enables investors in arranging their investment in a systematic manner. Investors can choose assets in such a pattern where they can sell some of them easily whenever they need funds.
  • Avoids Risk: Investment in securities is quite risky due to the volatility of the security market which increases the chance of losses. Portfolio management helps in reducing the risk through diversification of risk among large peoples.
  • Improves Financial Understanding: It helps in improving the financial knowledge of investors. While managing their portfolio they came across numerous financial concepts and learn how a financial market works which will enhance the overall financial understanding.

Disadvantages of Portfolio Management

  • Risk Of Over Diversification: Sometimes portfolio managers invest funds among large categories of assets whose control becomes impossible. In his efforts to diversify the risk it goes beyond the limit to manage efficiently. Loss arising in such situations is quite high and can bring serious repercussions.
  • No Downside Protection: Portfolio management only reduces the risk through diversification but does not provide full protection. At times of market crash, the concept of portfolio management becomes obsolete.
  • Faulty Forecasting: Portfolio management uses historical data for evaluating the returns of securities for investment purposes. Sometimes the historical data collected is incorrect or unreliable which leads to wrong forecasts.

JAIIB Paper 4 Module D Unit 2 Investment Management (Ambitious Baba) PDF

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