Why do you need an investment mandate?

Any investor, whether a newbie or someone who is already into the journey, needs to look at not just their options but also the kind of assets they have. An investor may wish to invest in mutual funds, for instance. So, how should one’s assets be invested? What set of guidelines or frameworks should a fund manager base their decision on?

The answer to these questions is an investment mandate. It is a blueprint or a set of instructions that an investor gives to a fund manager or a wealth manager to help them manage the investor’s wealth. It is the set of instructions an investment or wealth manager uses to manage an investor’s portfolio of assets.

If an investor takes Rs 3,00,000 to a wealth manager or a fund manager and tells them to grow their wealth or invest, the manager may not have a clear idea of what to do with the money without any guidelines about the purpose, goal or risk profile of the investor.

Instead, if an investor’s goal is to use it for their child’s foreign education ten years from now, it becomes a long-term goal, and the investment mandate is decided on this purpose and risk profile of the investor. Similarly, if an investor’s goal is to double their money in the quickest time possible, then the investment manager may employ a different strategy. No two people have the same mandate for their investments; some may be interested in preserving capital while others may be keen on growing their wealth in quick time.

Additional Read: Five reasons why your 20s are the best time to start investing

What is an investment mandate?

An investment mandate is a formal set of guidelines or instructions provided to an investment manager outlining how a specific pool of assets should be managed. These mandates are essential tools in both individual and institutional investment strategies, ensuring that investments align with the investor’s goals and risk tolerance.

At its core, an investment mandate specifies various parameters that govern the investment process. This includes the desired asset allocation, risk tolerance, financial goals, and any specific restrictions or preferences the investor may have. For instance, an investment mandate might dictate that a portfolio should focus on capital preservation, meaning the investment manager will prioritise low-risk assets to avoid significant losses.

Investment mandates are used in various investment contexts, from individual portfolios to large pooled funds like mutual funds and exchange-traded funds (ETFs). In the case of pooled funds, the mandate ensures that the fund manager’s decisions are aligned with the collective interests of all investors involved. For example, a mutual fund with a growth mandate will invest primarily in high-growth stocks. In contrast, a fund with an income mandate will focus on generating regular income through dividends and interest.

The components of an investment mandate typically include:

1. Objectives - Define the primary goals of the investment, such as capital growth, income generation, or capital preservation.

2. Risk tolerance - Assess the level of risk the investor is willing to accept. This will guide the selection of assets, balancing higher-risk investments like stocks with lower-risk options like bonds.

3. Asset allocation - Establish guidelines on how the funds should be distributed among different asset classes like stocks, bonds, and cash.

4. Restrictions - Identify any specific constraints or exclusions, such as avoiding certain sectors or adhering to ethical investment principles.

5. Performance benchmarks - Set criteria to evaluate your investment strategy's success by comparing the portfolio's performance to relevant market indices.

For individual investors, having a clear investment mandate helps communicate their financial goals and risk preferences to their financial planner, ensuring that their portfolio is managed according to their specific needs. For institutional investors, mandates provide a structured approach to fund management, fostering transparency and accountability between fund managers and stakeholders.

What will an investment mandate look like?

Typically, an investment mandate has a list of goals and priorities of the investor

It will also have the levels of risk the investor wishes to or can afford to take.

A mandate will in some cases have what kind of funds need to be avoided or included. An investment mandate is often drawn up by a financial planner or an expert a common individual investor seeks out.

Why do you need an investment mandate?

It is not just the private investor who uses an investment mandate. Fund managers also use the same. Typically, mutual funds, index funds or exchange-traded funds all have investment mandates. An investment mandate in a fund/pooled asset scenario allows investors to understand how their wealth will be used. An asset management company typically (AMC) has several mutual funds, each with its own investment mandate that tells the investor what kind of scheme they are getting into. An investor picks the one that aligns with their goals and purpose.

Having an investment mandate helps planners or financial advisors in charge of an investor’s accounts to guide them towards the right investment choices. It helps advisors make informed decisions based on the investors’ risk tolerance levels. Anyone investing on their own should also create a mandate for themselves so they can manage their money and take the right decisions.

Additional Read: Which Investment Option Is Best For The Risk Averse Investor?

Conclusion

Want to create your own mandate or look at the investment mandates of funds before you pick the right option? The Moneyfy app from Tata Capital offers easy investment options and advice for both beginners and those already investing. Features such as mutual fund scanner, listings, fund comparisons and goal-based investment help are crafted to help the individual investor make informed decisions.

FAQ

What is the purpose of the investment mandate?

An investment mandate provides a clear set of instructions and guidelines to an investment manager on how to manage a pool of assets. It outlines the investment goals, risk tolerance, asset allocation, and any specific restrictions or preferences. This framework ensures that the investment manager's decisions align with the investor's objectives, providing transparency and accountability in managing the investments.