It is a professional service in which high-net-worth and professional investors delegate investment decisions to experts. Instead of approving every trade, clients entrust daily portfolio control to a dedicated manager. This service allows well-heeled investors to save time, benefit from professional expertise, and rebalance portfolios in line with the agreed investment strategy on an ongoing basis in line with their risk appetite and long-term financial objectives.
Key Takeaways
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Under a discretionary portfolio management agreement, the investors give the portfolio manager the authority to make investment decisions within the agreed upon mandate.
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Make sure your assets are appropriate for your time horizon, risk tolerance and financial objectives.
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Save time and benefit from specialist market knowledge developed for the affluent.
What Is Discretionary Fund Management?
Discretionary fund management is a premium investment solution where you hand over the control of daily trading to a professional. You sign a discretionary mandate and grant the manager legal authority to buy and sell assets on your behalf. They are in charge of all market moves in real time and dynamically keep your portfolio aligned with your personal goals, without requiring your approval for each trade. As per the current SEBI regulation, the minimum investment amount for Portfolio Management Services, including Discretionary Fund Management or Discretionary PMS is ₹50 lakh
How Does Discretionary Fund Management Work?
By entrusting the heavy lifting to a professional, discretionary fund management reduces the stress associated with investing.
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You can step back and leave the day to day trading to a professional manager.
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First, both of you define your financial objectives and your tolerance for risk.
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They take that blueprint and build a custom mix of investments.
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The manager trades automatically, without your permission each and every time.
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They watch markets constantly, and rebalance your assets when things change.
Key Features of Discretionary Fund Management
With discretionary fund management, a professional does the hard work for you, removing the stress of investing.
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All your daily trading decisions are handled by experienced professionals, so you can focus on your life.
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They create a personal portfolio of a variety of assets to diversify your risk efficiently.
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The specialists are constantly watching the markets and will rebalance your investments as the markets change.
Read More About: Strategies to Select a good Portfolio Management Service
Types of Discretionary Fund Management Services
Discretionary fund management is not a cookie-cutter setup. Everyone has different goals, and managers employ different tactics to grow and protect your wealth. Here are a few:
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Individual Portfolio Management: Managers create a comprehensive, personalised plan based on your particular financial situation.
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Model Portfolios: Professionals invest your money in pre-built templates that are designed for specific risk levels.
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Multi-asset Portfolios: Diversify your risk by spreading your money across various asset classes.
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Equity-focused Services: Your money is invested by managers into shares primarily for long-term capital growth.
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Debt-focused services: They will mostly invest in bonds, they focus on capital preservation and consistent income.
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Balanced Portfolios: This strategy mixes debt and stocks to buffer against market downturns and benefit from growth.
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Goal-based Services: Managers tie each trade decision to specific future goals, like retirement.
Read More About: Portfolio Management Services Vs Mutual Funds
Who Should Consider Discretionary Fund Management?
If you’d rather leave it to a professional and don’t want to deal with the ups and downs of everyday market movements, then discretionary fund management or PMS is a game-changer. The following are the biggest beneficiaries:
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High-Net-Worth Individuals: Learn sophisticated wealth techniques.
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Professionals with hectic schedules: Let someone else do the daily monitoring of the market.
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NRIs: Most PMS providers also offer services to eligible NRIs subject to regulatory requirements.
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Retirees: Can assist with managing portfolios designed to create income while managing risk.
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Hands-off investors: Sit back and let a pro take care of everything.
Discretionary vs Non-Discretionary Fund Management
The choice between these two methods will depend on the amount of control you want over your trading each day. This is also known as Discretionary and Non-Discretionary PMS. They are compared against each other on key features:
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Feature |
Discretionary Fund Management |
Non-Discretionary Fund Management |
|
Decision-Making |
Manager decides and acts independently. |
Client holds final approval on all trades. |
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Client Involvement |
Low; you delegate daily management. |
High; you consult on every decision. |
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Execution Speed |
Instant; manager reacts immediately to markets. |
Slower; depends on your availability to approve. |
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Reporting |
Regular, detailed performance updates. |
Routine updates alongside trade confirmations. |
|
Flexibility |
High; portfolio adjusts rapidly to shifts. |
Moderate; bound by your response time. |
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Suitability |
Ideal for busy people wanting expert execution. |
Best for hands-on investors wanting final control. |
Benefits of Discretionary Fund Management
Growing your wealth becomes less stressful and uncertain when you deal with a discretionary fund management specialist.
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Have professional, disciplined investing that keeps panic out of your decisions.
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Your managers are constantly rebalancing your asset mix to reflect changes in the market.
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Active portfolio management can help you manage downside risk in volatile markets.
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It is better to spread your money across a range of different asset classes.
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You get your hours back by not having to follow the daily charts at all.
Risks and Limitations
Discretionary fund management services hold certain risks and limitations as follows:
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No manager can fully insulate your money from sudden market crashes or broader economic crises.
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The manager’s distinct investment approach and capacity to make sound choices will play a vital role in your financial performance.
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If the manager's philosophy fails or does not recognise a trend, your portfolio could underperform the overall market.
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And if you give up control you can’t block or approve individual trades yourself.
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You may find that the higher fees of this high-end, intensive supervision reduce your overall returns over time.
Read More About: What is a Mutual Fund Manager
Factors to Consider Before Choosing a Discretionary Fund Manager
Some factors you need to consider before choosing a discretionary fund manager:
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SEBI Registration: This credential should be checked first to ensure that your manager is following legal protections.
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Experience & Philosophy: Look for a strong track record in the market and an investment philosophy that is compatible with your goals.
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Historical Performance: Carefully examine previous returns to see how well they safeguarded funds throughout market downturns.
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Transparency and Reporting: To constantly know where your money is going, demand strict reporting guidelines.
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Fee Disclosure: To stop unstated expenses from depleting your wealth, demand a transparent fee disclosure up front.
Example of Discretionary Fund Management
Imagine you start with a ₹50,00,000 (₹50 Lakh) portfolio evenly split between tech stocks (50%) and bonds (50%). Following a major market rally, your stock holdings rise to ₹35,00,000, lifting your total portfolio value to ₹60,00,000.
However, tech stocks now account for nearly 58% of your total assets, leaving you overexposed to market volatility. Without waiting for trade approval, your discretionary fund manager automatically sells ₹5,00,000 worth of tech shares and reallocates the proceeds into bonds, thus locking in gains and restoring your target 50/50 balance (₹30 Lakh in stocks and ₹30 Lakh in bonds).
Conclusion
Discretionary fund management is when a professional manages your investments. They do the heavy lifting, from initial risk assessment all the way through to executing daily deals for you. They’re always watching the markets and can quickly reallocate your assets to protect your wealth if the economy changes.
This will cost you higher management fees but this hands-on approach will save you a tonne of time and spare you emotional trading. It automatically keeps investments on track. It saves busy professionals and high-net-worth individuals from staring at charts every day.
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