Crafting an investment policy statement (IPS) is crucial for nonprofits seeking to manage their financial assets responsibly. An IPS establishes clear guidelines for investment objectives, risk tolerance, and asset allocation. It serves as a roadmap for investment decisions, ensuring alignment with the organization’s mission and financial goals. This article provides a comprehensive template to assist nonprofits in creating an effective IPS.
1. Investment Objectives
The IPS should clearly define the organization’s investment objectives. These may include preserving capital, generating income, or achieving long-term growth. The objectives should be SMART (specific, measurable, achievable, relevant, and time-bound) and aligned with the organization’s mission and financial plan.
Nonprofits often prioritize capital preservation and income generation to ensure financial stability and support ongoing operations. However, long-term growth may also be a consideration for organizations with endowment funds or surplus cash reserves. A balanced approach may be adopted, balancing the need for stability with the potential for sustainable growth.
2. Risk Tolerance
Risk tolerance is a key component of the IPS. It determines the level of risk that the organization is willing to accept in pursuit of its investment objectives. Nonprofits typically have lower risk tolerance than for-profit organizations due to their dependence on donations and grants.
Factors to consider when assessing risk tolerance include the organization’s liquidity needs, investment horizon, and financial resilience. A conservative risk tolerance may lead to a portfolio heavily invested in low-risk assets such as bonds and cash equivalents. Conversely, a more aggressive risk tolerance may allow for a higher allocation to stocks or alternative investments.
3. Asset Allocation
Asset allocation refers to the distribution of the organization’s investment portfolio among different asset classes. The IPS should establish guidelines for the target allocation to stocks, bonds, cash, and other investments.
Nonprofit organizations often adopt a diversified asset allocation strategy to mitigate risk. This involves investing in a range of asset classes with varying risk and return profiles. For example, an endowment fund may allocate 60% to stocks, 30% to bonds, and 10% to cash and other investments. The target allocation may be adjusted over time based on market conditions and the organization’s changing needs.
An investment policy statement template for nonprofits is a valuable tool for guiding investment decisions and ensuring alignment with the organization’s mission and financial goals. By carefully considering investment objectives, risk tolerance, and asset allocation, nonprofits can create an investment portfolio that meets their unique needs and supports their long-term sustainability.
