Importance Of Investment Policy Statement

or one more tweet which is perfect for this

What is most important thing in investing? or What is hurdle for making investment? Your emotions.

So How to handle them? In fact what is IPS? why this is important ? Lets check.

If you are long term investor, then you maybe aware that it need to control your emotions. Patience is one of the important thing in investing. If you have knowledge about investing, then its OK, but if you don’t have then you may need to take help from professional. How can one Professional will remember all of their clients needs and demands ? How can one party be sure that another party is faithful? some contract type paper is very important and that is what IPS is all about.

IPS or Investment Policy Statement is a document, generally between an investor and Asset Manager Managing Portfolio of Investor, recording the agreement the two parties come to with regards to issue relating to How the investors money is to be managed. – WIKIPEDIA

Investment policy statement is document drafted between portfolio manager and a client that outline general rules for manager. – Investopedia

Most of the time its very ignored thing when it comes to individual investors. Survey of advisors from Russel Investments found that 61% financial Advisors do not create One Investment Policy Statement. 605 also inform that their clients also ask them to take an action which may affect the return by deviated from investment plan that advisor and client are agreed upon. Many advisors also inform that investors ask them to change portfolio when first sign of  turbulence are visible in market. Institutional Investors are aware about it and they are keeping it. Reason is maybe the size of portfolio, complex asset allocation, sometimes more than one fund manager.

Investment Policy Statement consists 5 Constraints

  1. Time Horizon : Time is very important Factor in making portfolio. Say you have 5 years time for achieving goal. How can you make portfolio? now assume that same goal having 3 years. Is there any change? Retirement Portfolio and buying home or buying car are two different. That’s it.
  2. Taxes : One of the most important thing. In India and I think all over the world, return on equity investments if earned in long term are tax free. But there are some other things are having in portfolio which may make you taxes takes into account. generally as country change, rules and laws changed.
  3. Liquidity : Say the client is student having need of money in between Investing time period. another example is one retired father having three children, all of them earning money. Father don’t need any money and living with his older son. now compare their liquidity needs. worst thing about (100 – age) formula ignore this factor. That’s why this is outdated formula. More the Liquidity you need, Lower Risk you can take
  4. Legal : so many different thing including here. Like assume, Promoter of DLF limited, come to you and asked about Fund raising. You need to think about that he is prohibited to take any action. though important but not possible. so talk about law expert.
  5. Unique : You cant advise Muslim client to invest in Bank of America stock. He may invest in Black rock stock as its black rock is private equity, which is not about interest. If you told me to invest in Yes bank stock, I will stop my agreement with you. Lockheed Martin, defense stock may be not good for christian client. some clients will not find it bad to invest in ITC But for me, I don’t like. Recently as we are listening about Crypto – Currency like Bitcoin, some people don’t understand it like me.


Constraints are telling it clearly. why its important.

  • Portfolio is constructed for taking your personal needs and demands into account. Changing it all because of small crash like 5% down is nonsense. When IPS is constructed, your advisor was taking care for it.
  • IPS Tabulate Return needs, Risk profile and also unique constraint. Say Your financial ability is not permitted to invest in private equity, But you want to invest in it? what to do in such situation? IPS will help in it.
  • Introduction of new types of securities may tempt you to go for it. But what if there is no use for you by investing in it? when In India Infrastructure Investment Trust was introduced, Many peoples were confused but institutional investors were ready to invest in it. Reason? They Hold their IPS.
  • Are you exposed to any political or any Material Nonpublic Information about any specific company? Your IPS is highlighting it. Is their any prohibition on client?
  • If their any unique things about client, then its also here.

About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me or @androidashu & @InsideFinanc on twitter