4 min
11-October-2024
Investment management can be complex and time-consuming, especially for those with limited financial knowledge or time to actively manage their portfolios. Discretionary investment management is a solution designed for such individuals, providing them with professional portfolio management services. In this article, we will explore what discretionary investment management means, the associated risks, and the potential benefits it offers to investors in India.
Once the investor sets up a plan with the manager, all subsequent investment decisions, such as buying or selling assets, reallocating funds, and managing risk, are handled without needing the investor’s prior approval for each transaction. The key benefit here is that the investor doesn't have to be involved in the day-to-day decisions, allowing the manager to react quickly to market changes.
For example, an investor might have a mix of equity and debt investments but not have the expertise to adjust these allocations as market conditions shift. By hiring a portfolio manager under discretionary investment management, the manager can rebalance the portfolio when necessary, ensuring that it aligns with the investor’s goals without constant communication.
This approach works well for individuals who may not have the time or expertise to actively manage their own investments but still want their portfolios to be handled with professional care.
1. Loss of control: One of the most significant risks of discretionary investment management is the loss of control. Since the portfolio manager makes all investment decisions without consulting the investor for each trade, there is a chance that the investor may not agree with some of the decisions. For example, the manager may decide to sell a particular stock that the investor preferred to hold onto for the long term. While the manager works within the guidelines set by the investor, there is still a level of trust that must be established.
2. Market risk: Discretionary investment management does not eliminate market risks. Like any other investment approach, portfolios are subject to fluctuations in the market. If the portfolio manager takes on riskier investments or if the markets experience a downturn, there can be significant losses. While the manager may try to mitigate risk based on the investor’s profile, market volatility is always a concern.
3. Performance risk: There is no guarantee that a discretionary portfolio manager will outperform the market or achieve the investor’s financial goals. Investment performance can be unpredictable, and even experienced portfolio managers may not deliver consistently high returns. Additionally, the manager's strategies may not align with the investor’s expectations, leading to potential underperformance in comparison to other investment options available in the market.
1. Professional expertise: One of the primary benefits of discretionary investment management is the access to professional expertise. Portfolio managers have deep knowledge of financial markets and investment strategies. They stay updated on market trends, economic indicators, and potential risks, helping them make informed decisions on behalf of the investor. This is especially beneficial for individuals who lack the expertise or time to manage their investments.
2. Tailored investment strategies: Portfolio managers work closely with investors to understand their financial goals, risk tolerance, and time horizon. Based on this information, they create a customised investment strategy tailored to the individual’s needs. This ensures that the portfolio is aligned with the investor's objectives, whether it is wealth preservation, capital appreciation, or income generation.
3. Time efficiency: Discretionary investment management is ideal for busy individuals who do not have the time to actively monitor and manage their investments. By handing over control to a professional manager, investors can save time while still ensuring that their investments are being handled by an expert. This time-saving benefit allows investors to focus on other aspects of their personal or professional lives without constantly worrying about market conditions or investment decisions.
4. Quick decision making: Since the portfolio manager has full discretion over the investment decisions, they can react quickly to changes in market conditions. This quick decision-making can be advantageous in volatile markets where timing is critical. For instance, if there is a sudden market drop or an opportunity for a high return on a particular stock, the manager can act promptly without having to wait for the investor’s approval.
By allowing professionals to manage the portfolio, investors can avoid the emotional decision-making that often leads to poor investment outcomes. Emotional decisions like panic selling during market downturns or buying into trends without proper research can negatively affect long-term returns. Managers act based on data and long-term strategies, mitigating emotional biases.
If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.
What is Discretionary Investment Management?
Discretionary investment management refers to a service where a financial advisor or portfolio manager makes investment decisions on behalf of the client. The investor delegates full authority to the manager, trusting them to manage the portfolio based on the investor’s risk tolerance, financial goals, and overall preferences.Once the investor sets up a plan with the manager, all subsequent investment decisions, such as buying or selling assets, reallocating funds, and managing risk, are handled without needing the investor’s prior approval for each transaction. The key benefit here is that the investor doesn't have to be involved in the day-to-day decisions, allowing the manager to react quickly to market changes.
For example, an investor might have a mix of equity and debt investments but not have the expertise to adjust these allocations as market conditions shift. By hiring a portfolio manager under discretionary investment management, the manager can rebalance the portfolio when necessary, ensuring that it aligns with the investor’s goals without constant communication.
This approach works well for individuals who may not have the time or expertise to actively manage their own investments but still want their portfolios to be handled with professional care.
Risks of Discretionary Investment Management
While discretionary investment management can be highly beneficial, there are also inherent risks involved. Here are three key risks to consider:1. Loss of control: One of the most significant risks of discretionary investment management is the loss of control. Since the portfolio manager makes all investment decisions without consulting the investor for each trade, there is a chance that the investor may not agree with some of the decisions. For example, the manager may decide to sell a particular stock that the investor preferred to hold onto for the long term. While the manager works within the guidelines set by the investor, there is still a level of trust that must be established.
2. Market risk: Discretionary investment management does not eliminate market risks. Like any other investment approach, portfolios are subject to fluctuations in the market. If the portfolio manager takes on riskier investments or if the markets experience a downturn, there can be significant losses. While the manager may try to mitigate risk based on the investor’s profile, market volatility is always a concern.
3. Performance risk: There is no guarantee that a discretionary portfolio manager will outperform the market or achieve the investor’s financial goals. Investment performance can be unpredictable, and even experienced portfolio managers may not deliver consistently high returns. Additionally, the manager's strategies may not align with the investor’s expectations, leading to potential underperformance in comparison to other investment options available in the market.
Benefits of Discretionary Investment Management
Despite the risks, there are several notable benefits to discretionary investment management. Here are four key advantages:1. Professional expertise: One of the primary benefits of discretionary investment management is the access to professional expertise. Portfolio managers have deep knowledge of financial markets and investment strategies. They stay updated on market trends, economic indicators, and potential risks, helping them make informed decisions on behalf of the investor. This is especially beneficial for individuals who lack the expertise or time to manage their investments.
2. Tailored investment strategies: Portfolio managers work closely with investors to understand their financial goals, risk tolerance, and time horizon. Based on this information, they create a customised investment strategy tailored to the individual’s needs. This ensures that the portfolio is aligned with the investor's objectives, whether it is wealth preservation, capital appreciation, or income generation.
3. Time efficiency: Discretionary investment management is ideal for busy individuals who do not have the time to actively monitor and manage their investments. By handing over control to a professional manager, investors can save time while still ensuring that their investments are being handled by an expert. This time-saving benefit allows investors to focus on other aspects of their personal or professional lives without constantly worrying about market conditions or investment decisions.
4. Quick decision making: Since the portfolio manager has full discretion over the investment decisions, they can react quickly to changes in market conditions. This quick decision-making can be advantageous in volatile markets where timing is critical. For instance, if there is a sudden market drop or an opportunity for a high return on a particular stock, the manager can act promptly without having to wait for the investor’s approval.
By allowing professionals to manage the portfolio, investors can avoid the emotional decision-making that often leads to poor investment outcomes. Emotional decisions like panic selling during market downturns or buying into trends without proper research can negatively affect long-term returns. Managers act based on data and long-term strategies, mitigating emotional biases.
Conclusion
Discretionary investment management offers a convenient and efficient way for individuals to have their investments professionally managed. By allowing portfolio managers to make decisions based on market conditions and investment goals, investors can benefit from professional expertise and customised strategies. However, it is important to recognise the risks, including the loss of control and potential market underperformance. Before choosing discretionary management, investors should assess their risk tolerance and ensure they trust the expertise of the portfolio manager.If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.
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