Investment Policy Statement

Every individual is unique and so is his Investment Objectives, for some it might be Capital Appreciation, for few it might be Capital Preservation for some it might be a mix of both. So anyone who is planning to start Investing, you need to have your Objectives mentioned in a document.

What is an IPS? according to Investopedia – An investment policy statement (IPS) is a document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an investment policy statement.

It basically gives guidelines to the Advisor to formulate a Investment Plan for an individual or a corporate. Whenever the client and the advisor sit for portfolio review it helps them to check for any deviations and also the process made on their plan. What are some of the factors which helps in making this document?

Describe the overall investment objective – The IPS should relate the purpose of the assets being invested to one or more broad investment objectives. Determine the Short term and Long term goals and the time frame to achieve the same. Give details about expected Cash flow, Tax structure etc.

Define the Risk tolerance – The IPS should describe the investor’s general philosophy regarding tolerance for risk. The IPS should acknowledge that the portfolio will be subject to the assumption of risk, and have the potential for returns associated with risk to be both positive and negative over time. Thus, understanding the risk factor is one of the major keys for choosing an investment scheme. The risk tolerance may differ for every investor, our age and the emotional make-up, also largely impact our ability to tolerate risks. Risk tolerance levels may differ for every part of your portfolio.

State the Return Expectations – State the overall investment performance objective, Careful specification of the overall investment performance objective and Identify performance objectives for each asset class eligible for investment. The IPS should mention all permissible asset classes in which the portfolio may be invested in and an appropriate Benchmark for the same.

Determine appropriate Asset Allocation – An asset allocation framework provides strategic context for many tactical investment decisions. Asset allocation policies are likely to change over time as characteristics of the investor change and as market circumstances vary. The IPS should be revised whenever this occurs. The IPS, however, should address the assumptions used in developing and selecting inputs to the asset allocation decision process.

Total Wealth: The IPS should also consider the assets outside the discussed portfolio. The value of a person’s expected pension, or his other retirement benefits may influence the return objectives and risk tolerance of his investment portfolio. Lot of clients might get good rental income, or any other extra income which should be incorporated in the IPS. Moreover, our wealth levels can also impact the way we live (our lifestyle). A desired standard of living determines our risk tolerance factor, and should be considered with your investment objectives.

Investment Time Horizon: This may require us to ask questions such as:

• When do you plan to withdraw the assets in your portfolio?
• Would you be in need of any payout for any Medical Emergency?
• Do you prefer to choose short or long term maturity assets?
• Do you have enough time to recover for any loss from a bearish market?
• How important is capital preservation, for meeting an urgent financial need?

Few other points like, Job Security, Medical History of Immediate Family Members, Cash flow from spouse employment and whether that can be utilised. Current Tax status and what changes can be expected in the same.

The investment policy statement (IPS) serves as a strategic guide to the planning and implementation of an investment program. When implemented successfully, the problems or issues related to your Portfolio Management can be dealt with ease. The IPS establishes accountability, perhaps most importantly, the IPS serves as a policy guide that can offer an objective course of action to be followed during periods of market disruption, personal exigencies,  when emotional responses might otherwise motivate less prudent actions.

Not every factors discussed will be appropriate for every one, IPS is more or a customised plan so based on your situation you can omit or add any of the points discussed after discussing with your Advisor.

Happy Investing!

R♥Vi