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Investment Policy

Any organization that is in the business of investing funds must have its own investment policy. This is important to the success of the organization because there are a large number of avenues for investment, and each of them has its own merits and demerits. Any single investment company or an angel investor firm cannot invest in all kinds of diverse avenues because funds are a limited resource. To make the optimal use of funds, it is useful to have a well defined and cohesive investment policy. The policy spells out the parameters within which the investment fund must operate. That ensures that there are no haphazard investments that go against the core philosophy, belief, mission, purpose and goals of the investment company. 

Investment Policy Statement (IPS)

A professional angel investor company or any other investment bank or organization makes sure that the investment policy is clearly documented so that there is no scope for confusion about the parameters laid down in the policy. Investment managers who handle diversified portfolios and substantial amounts of funds need such a policy to make sure that there are no deviations from it during the course of their investment decisions. 

Not just for the existing investment portfolios, but even for new investment funds, it is important the investment policy is put in place well in advance. This ensures that every investment decision and portfolio addition that is made conforms to the goals and mission of the investment fund right from the start. The key advantage of an investment policy is that it substantially cuts down the chances of emotional decision making. However tempting an investment opportunity may appear to be at the outset, but if it goes against the fundamental spirit of the fund’s investment policy, the portfolio managers will be able to reject that investment option. Therefore, it ensures a dispassionate and objective approach to investments which pays off in terms of profitability in the long run. 

This is equally true of angel investors who are looking at investing in new and upcoming projects that may not have a proven past track record of performance. In such a situation, it becomes critical that a very objective and pragmatic view of the investment opportunity should be considered. At the same time, various candidates for investment should be compared and analyzed before finalizing the investment.

The Use of Investment Policy for a Small Investor

Large investment houses and institutional investors with major portfolios have always relied on investment policies to maintain a unified and cohesive direction for their investments. However, in recent years, even smaller angel investment firms and even high net worth individuals have begun maintaining clear investment policy for their investments. In fact, many people who retire with substantial savings and wish to have a safe and sustainable retirement plan make an investment policy to ensure they place their funds in a manageable investment portfolio. 

Matching the Investment Policy with the Investment Philosophy

Every investor has a core belief or a philosophy which he stands by at all times in all his investments. Large investment funds usually have a very clear philosophy of choosing investments that uphold the highest values of corporate social responsibility and protecting the shareholders’ interests as the top priority. These are examples of investment philosophies of an investor. Once the philosophy is clear and focused, it is possible to formulate an investment policy that conforms to the basic tenets of the philosophy. 

Key Elements of an Investment Policy

Any professionally documented investment policy will include the following key elements: 

Policy Objectives: This marks a clear and focused direction of investments. It spells out the areas of investment and the modes of investment that will be used by the investment fund. The investor will choose such areas where his team has the necessary expertise, knowledge and experience, and where it matches with the core values of the company. 

Risk Tolerance: It is very important to decide the extent of risk taking that the investment fund is willing to indulge in. A careful balance must be maintained between safe and secure investments, moderately risky investments, and high risk investments. This needs to be defined clearly in the investment policy. A diversified portfolio of investments in all these categories ensures that the risk is spread out, and optimal returns on investments can be achieved at the same time. 

Permissible Assets: Whenever the investment fund is keen to acquire any assets, the acquisitions must conform to a single cohesive policy followed by the fund. The investment policy must state clearly the types of asset classes that the fund would like to invest in, and the asset classes that would always avoid. Some assets may be more liquid in nature, while others may not be. Similarly, some asset classes may offer higher returns but may have a higher risk of loss as well. Therefore, a good asset portfolio is created when it follows a clear and well defined policy. 

Portfolio Re-balancing: The investment house must make a clear decision in the investment policy on how and when the portfolio will be re-balanced. Some policies make it a period exercise, while some other investors believe in re-balancing only when the circumstances demand such an exercise.