An Investment Policy is a document which can lay down the foundation for meeting your long term investment objectives. Although most of us do make investments to meet our goals but we hardly creates any written framework where we can write our objectives and needed investments. Through an investment policy you can ensure that you have stated your long term plan which is the basis for making those disciplined investments decisions which you need for achieving your goals. A written investment policy helps to identify your objectives and constraints, if any, in meeting them very clearly. If you can achieve this you can find out what strategies you need to follow from the universe you are resented with.
Another benefit of creating an investment policy is that you can review your objectives very clearly. This makes it easier to inculcate a standard review process for your investments and the objectives aligned with them.
We also use an Investment Policy Statement for our clients to ensure there are specific investment guidelines for both of us to follow.
In general, an investment policy will specify how your investment portfolio need to be structured, what should be your target rate of return, what is the time horizon for your investments, your risk tolerance level parameters within which you should allocate your investments, intermediate or emergency liquidity requirement and what will be the amount you will contribute along with anticipated withdrawal requirement from your investments portfolio.
Here is what you should include when you are creating your Investment Policy:
Write A Summary
A summary gives you an overview of your investments and its objectives. In one glance it will tell you why you want to make your investments and what you need to do. This section will generally state the following:
- Your current assets
- The investible surplus in your hand
- Time horizon of your investment
- Returns you expect from your assets
- The allocation to various assets
- Your selected investments and their benchmark
All the above details will give you a status of your current situation and the course of direction going forward. Once you have the summary you can then write down the various elements in detail which will be personal guidelines for making your investments.
State Your Investment Objectives
You make investments for meeting some objectives. This part of your Investment Policy lays down them very specifically. Whether you need a regular income after a certain years or a lump sum corpus will be required by you, both such income distribution needs will be stated. Once you are aware about your liquidity requirement from your investment portfolio it makes it easier for you to choose an asset allocation for your investments.
Time Horizon and Your Risk Attitude
All of us have a different risk tolerance to volatile assets. Unless our portfolio is aligned with it we will always be prune to committing mistakes of withdrawing at wrong time. So before you can create your investment portfolio, it’s necessary that you have an assessment of your comfortability with volatile assets i.e. your risk tolerance. We asses our clients risks tolerance through “Finametrica”. You can download the information here –
If you too desire to understand your risk tolerance you can send us the details at below link-
The other aspect to illustrate here is the time horizon of holding your investment which will actually give you the withdrawal requirement i.e. when you will need funds for your goals for which you will have to withdraw from your investment portfolio. For e.g. if your requirement is regular income then you may need a regular withdrawal from the corpus or if aiming for your child higher education there may be lump sum requirement after a defined period. Both these analysis help you in reaching to an ideal asset allocation which you need to follow to meet your objectives. It also helps you in estimating a reasonable return expectation from your investments avoiding all those common mistakes.
Asset Classes and Your Allocation
Once you have listed down your objectives, time horizon and know your tolerance to the asset classes, the next comes is the asset selection. Which assets classes you should be investing and which one you will avoid is a selection based on above parameters. This section will comprise the details. So when you are investing you will be following an asset allocation and based on your risk tolerance you will keep a constraint on each asset class to invest. For e.g. If you have a conservative approach you will not like to go beyond 15-20% in equities and similarly, with an aggressive approach you will not like to invest more in debt instruments. By keeping a constraint on these asset classes you ensure you manage your investments within your tolerance level.
Selection of Specific Investment and Strategy
Once you have decided allocation of your surplus to various assets, you need to then identify specific investment alternatives within those asset classes. Unless you have a selection criteria it will be difficult to find one which can match your objective. So if you have selected mutual funds for investing, considering the long list and categories, you need to decide on certain parameters which will select the few ones. For e.g. the parameters may be past performance, peer comparisons, existence of company, fund manager profile etc. Whatever you choose your parameters, by writing it in your Investment Policy makes it easier for you to review the underline investments and take appropriate measures if any of them divert from the objectives. Also you state the strategy of investing i.e. diversification, monthly contribution (SIP), STP if you need regular withdrawal etc.
No investment is successful if you don’t have a monitoring process. How you will monitor your investment and at what frequency? is what you illustrate here. You can choose to monitor quarterly or annually your market related investments and fixed investments at year end. The monitoring process will analyze your objectives and the achievement within your investments. Whether your gains are within your expected range and losses are not more. Is objectives of the investment intact or there is a change…all these questions will be answered in a review process which you list down here.
An Investment Policy is a written roadmap for meeting your investment objectives. It serves as a guide to make investment decisions and follow them with a strategic review process. To summarize following contents should be covered while you are creating an investment policy:
- Your financial goals, objectives you want to achieve and your horizon for reaching them
- Your willingness and ability to assume investment risk
- What return you expect from your investments?
- Your requirement such as regular income need or surplus from any goal
- Guideline for choosing asset allocation
- Your selection of specific investments
- By when you will implement your asset allocation and how frequent you will rebalance it
- What strategy will you use to invest such as monthly investment or a lump sum
- Which investment schemes and what will be the benchmark for analyzing them
- How frequently you will monitor and rebalance your investment portfolio?
How you decide your investments? Do you align them with your financial goals? Would you like to asses your risk tolerance?
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