or one more tweet which is perfect for this

What is the most crucial thing in investing? What is the hurdle for investing? Your emotions.

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

If you are a long-term investor, you may know that you need to control your emotions. Patience is one of the essential things in investing. If you know about investing, it is OK, but you may need help from a professional if you don’t have one. 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 significant, which 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, it is a very ignored thing regarding individual investors. A Survey of advisors from Russel Investments found that 61% of financial Advisors do not create a One Investment Policy Statement. 60% also inform that their clients ask them to take any action that may affect the return by deviating from the investment plan that the advisor and client agreed upon. Many advisors also inform that investors ask them to change portfolios when the first signs of turbulence are visible in the market. Institutional Investors are aware of it, and they are keeping it. The reason may be the portfolio size, complex asset allocation, and sometimes more than one fund manager.

The investment Policy Statement consists of 5 Constraints.

  1. Time Horizon: Time is a significant Factor in making a portfolio. Say you have five years to achieve your goal. How can you make a portfolio? Now assume that the same purpose had three years. Is there any change? Retirement Portfolio and buying a home or buying a car are two different. That’s it.
  2. Taxes: One of the most important things. In India and I think all over the world, return on equity investments are tax-free if earned in the long term. But some other things in a portfolio may make your taxes consider. Generally, as the country change, rules and laws change.
  3. Liquidity: The client is a student requiring money in between the investing time. Another example is one retired father having three children, all earning money. Father doesn’t need any money and living with his older son. Now compare their liquidity needs. The worst thing about the (100 – age) formula is that it ignores this factor. That’s why this is an outdated formula. More the Liquidity you need, the Lower Risk you can take
  4. Legal: Assume the Promoter of DLF limited came to you and asked about Fundraising. It would be best if you thought he was prohibited from taking action. Though important but not possible. So talk about law experts.
  5. Unique: You cant advise Muslim clients to invest in Bank of America stock. He may invest in Black rock stock as black rock is a private equity, which is not about interest. If you told me to invest in Yes bank stock, I would stop my agreement with you. Lockheed Martin defense stock maybe not be suitable for Christian clients. Some clients will not find it immoral to invest in ITC, but I wouldn’t say I like it. Recently as we are listening about CryptoCurrency like Bitcoin, some people don’t understand it like me.

SO WHY INVESTMENT POLICY STATEMENT IS IMPORTANT?

Constraints are telling it why it’s essential.

  • The portfolio is constructed to take your personal needs and demands into account. So changing it all because of a minor crash like 5% down is nonsense. When IPS is built, your advisor takes care of it.
  • IPS Tabulate Return needs a Risk profile and also a unique constraint. For example, say Your financial ability is not permitted to invest in private equity, But you want to invest in it? What to do in such a situation? IPS will help with it.
  • Introducing new types of securities may tempt you to go for it. But what if there is no use for you in 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 material nonpublic information about any specific company? Your IPS is highlighting it. Is there any prohibition on the client?
  • If their any unique things about the client, it’s also here.