Lesson 12: Key Steps involved in Investment Research and Due Diligence (Portfolio Management)

Welcome to Lesson 12 of our Portfolio Management Lessons for Beginners in India series. In this lesson, we will focus on the crucial aspects of investment research and due diligence. As an investor, it is essential to develop the skills to conduct thorough research and perform due diligence on potential investment options. By doing so, you can make informed decisions, mitigate risks, and increase the likelihood of achieving your financial goals. In this lesson, we will explore the key steps involved in investment research and due diligence, discuss relevant scenarios and examples to help you navigate the investment landscape in India.

II. Steps in Investment Research and Due Diligence: 

A. Define investment objectives and criteria:

1. Clearly define your investment objectives, such as capital preservation, income generation, or long-term growth.

2. Establish criteria for potential investments, considering factors like risk tolerance, time horizon, and desired asset classes.

Example: An investor aims to generate long-term growth and sets criteria for investing in high-growth sectors and companies with strong competitive advantages.

Lesson 12: Key Steps involved in Investment Research and Due Diligence (Portfolio Management) Continued…

B. Identify investment options:

1. Conduct research to identify potential investment options based on your defined criteria.

2. Consider different asset classes, such as stocks, bonds, mutual funds, real estate, or commodities.

Example: An investor researching investment options in India identifies a mix of blue-chip stocks, government bonds, and real estate investment trusts (REITs) as potential choices.

C. Gather information and perform analysis:

1. Collect relevant information about the investment options, including financial statements, industry reports, regulatory filings, and news articles.

2. Analyze the information using various techniques like fundamental analysis, technical analysis, or valuation models.

Example: An investor conducts fundamental analysis by reviewing financial statements, assessing company management, and evaluating industry trends to gain insights into the potential investment options.

D. Assess risks:

1. Identify and evaluate risks associated with each investment option.

2. Consider factors like market risk, credit risk, liquidity risk, geopolitical risk, and regulatory risk.

Example: Assessing risks, an investor in India analyzes factors such as currency risk, political stability, and industry-specific risks when considering international investments.

E. Conduct due diligence:

1. Perform due diligence on potential investments, including conducting site visits, meeting with company management, and reviewing legal documents.

2. Verify the accuracy of information and assess the investment's viability and alignment with your investment objectives.

Example: An investor interested in a real estate project visits the site, reviews construction plans, meets with the developer, and engages legal professionals to ensure compliance with regulations and evaluate the project's potential.

F. Monitor and evaluate:

1. Regularly monitor your investment portfolio to assess performance, market conditions, and changes in investment options.

2. Continuously evaluate the investments' alignment with your investment objectives and make adjustments as necessary.

Example: An investor in India monitors their portfolio regularly, analyzing company earnings reports, tracking market trends, and evaluating the portfolio's overall performance. They make adjustments by adding or removing investments based on their analysis.