Establishing an Investment Policy for a Nonprofit

Nonprofit organizations should have a written policy for investing excess cash. The objective of this policy is to assist the organization in effectively supervising, monitoring and evaluating its investment assets. The organization’s board of directors, or a separate investment committee of the board, should design and approve the organization’s investment policy, and the following items should be considered when established or revising an investment policy:

  • Types of securities in which the organization can invest: For example, XYZ Organization will invest in cash, money market accounts, mutual funds or institutional grade common stock.
  • Quality rating and maturity of fixed income securities: For example, XYZ Organization’s investments in bonds must be in “A” or better, as rated by Standard & Poor’s or Moody’s with maturity dates of seven years or less.
  • The anticipated earnings rates for the investments:  For example, XYZ Organization seeks to earn a total return on investments of 5%.
  • The use of professional financial advisors such as investment managers: For example, XYZ Organization will use an investment manager for its investments and he or she will provide monthly reports to the investment committee, as well as meet with the full board of trustee semi-annually or annually.
  • Asset diversification outlining the set dollar of percentage limits on the type of investments in the nonprofit organization’s portfolio: For example, no less than 15% and no more than 30% of XYZ Organization’s investments are to be in equity securities.
  • Type of investments in which the nonprofit organization may not invest:  For example, XYZ Organization will not invest in securities purchased on margin, stock options of futures or derivative instruments.
  • Rebalancing of strategic allocation should be adopted as a risk-management strategy: Once an asset allocation is implemented that matches the portfolio’s risk tolerance, rebalancing annually should allow the maintenance of risk exposure at an appropriate level. Investment managers must consult with the investment committee before rebalancing.
  • Establish procedures for monitoring: Procedures and criteria should be established for the Investment Committee to monitor the performance results achieved by the investment manager on a regular/pre-determined basis and report performance to the Board of Directors.

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