investment policy statement in investment policy statement or IPS is a formal document drafted by an investment manager that serves as a strategic Guide to the planning and implementation of an investment program.

the purpose of the investment policy is not just documentation, but it also provides guidance for consistent informed decision making a good IPS should also clearly delineate the responsibilities of all parties involved in the investment program the client or the Board of Trustees the investment committee the investment advisor, which may be an Outsource provider and the custodian The document identifies the goals and objectives for a company's investment portfolios as well as allowable parameters for achieving those goals.

Analyzing the many potential circumstances and goals for individuals or institutions can be challenging a systematic approach to documenting objectives constraints and governance mechanisms is useful for clarifying responsibilities and establishing accountabilities.

The IPS is a highly customized document that is uniquely tailored to the preferences attitudes and situation of each investor.

Constructing an IPS should be a dynamic process while changes to the document should be infrequent. The IPS should be reviewed annually to ensure that all language and content reflect current views and remain aligned with long-term objectives while an IPS can take a variety of forms. These are some of the typical components an introduction describing the client of the investment entity a statement of purpose stating the purpose of the IPS the statement of duties and responsibilities detailing those for the client the custodian of the clients assets and the investment managers procedures explaining the steps to keep the IPS current and how to respond to various contingencies investment objectives explaining the clients investing objectives both in terms of return and risk investment constraints presenting the factors that constrain the client and seeking to achieve the investment objectives. We will take a look at these two critical components later in this module investment guidelines outlines strategic asset allocations based on objectives and constraints this section also provides information on how policies should be executed for example on the permissible use of Leverage and derivatives and on specific types of assets excluded from investment. If any also how rebalancing is conducted if applicable evaluation in review provides guidance for obtaining feedback, On the investment results and supporting documents might be included in the appendix such as an acid allocation policy statement investment objectives are typically split into two categories return and risk objectives ensure that the risk of the portfolio is suitable for the client. The IPS should clearly specify the client's risk tolerance a client's overall risk tolerance is a function of their ability to Bear risk depending on their circumstances and their attitude which is more behavioral and might be considered as the clients willingness to take on risk here. We see two examples of risk objectives and absolute measure for an individual client and a relative one for an institution against a benchmark return objectives carefully specify the overall investment performance goals, they are likely to incorporate descriptions of General funding needs and the relationships of those needs to key factors such as the inflation or the spending rate a clients return objectives can be stated in Number of ways similar to risk objectives return objectives may be stated on an absolute or relative basis the example shown are absolute but a relative example could be a desire to outperform The Benchmark index by one percentage Point per year some institutions also set their return objective relative to a peer group or Universe of managers. For example, a fund manager may have an objective for return that is in the top 25% of returns in a category investment constraints can be split into five main categories.

Liquidity the likely requirements to withdraw funds from the portfolio examples for an individual investor would be outlays to buy a second home or for college tuition for institutions. It could be spending rules for endowment funds or benefit payments for Pension funds when the client has such a requirement the manager typically allocates part of the portfolio to cover the need in liquid assets and have low risk when the liquidity need to Rises time Horizon the time Horizon of the investor will affect the type of Investments used in the portfolio. For example, illiquid or risky Investments may be unsuitable for an investor with a short time Horizon because the investor may not have enough time to recover from investment losses taxes. These are most important for individual investors rather than institutional investors because in many jurisdictions endowments Pension funds and Foundations are not taxable entities, not only do individual tax rates differ widely from Individual to individual but most investors are also taxed different.

On the return source, for example, some will face a different tax rate on income such as dividend and interest payments then they do on capital gains in these issues need to be considered during the portfolio's construction legal and Regulatory unlike taxes. These are more relevant to institutions rather than individuals with some exceptions in some countries institutional investors such as Pension funds are subject to restrictions on the amount of equities or other risky asset that they can hold unique factors. For example, certain religions. Do not allow investments in certain industries Charities and Foundations may also have limitations based upon their mission in values other examples include large restricted Company stock that can't be sold or a lock-up private investment.