Fundamentals of Developing an Investment Policy for a Not-for-Profit

Does your not-for-profit have underutilized funds? Could you use another source of income to support your mission?  Investing the funds in stocks and bonds or other investment vehicles may be an option to generate extra income.  But before investing the not-for-profit’s funds, the board of directors, with management’s assistance, should strongly consider developing an investment policy. 

An investment policy is one of the most important tools that a not-for-profit can develop to ensure that they protect the funds they have invested.  The board of directors may delegate the responsibility for the investment policy to the finance committee or even establish a separate investment committee to develop and monitor the investment policy.

According to the Council of Nonprofits, “there are three competing interests for any funds that a nonprofit invests: (1) protecting (and growing) the investment, (2) earning a reasonable interest rate, and (3) maintaining access to the invested cash when needed.”  It is important to keep these factors in mind when developing an investment policy to ensure that the organization is getting the most of their invested funds while minimizing the risks.

Note that if your not-for-profit has an endowment, it should take that into consideration when developing the investment policy or develop a separate endowment policy that references the investment policy.

The following are basic fundamentals of a sound investment policy that will ensure that you address the considerations noted by the Council of Nonprofits:

1. Objectives – The overall investment goals and objectives should be clearly stated in the investment policy. The objectives should include the desired rate of return, the length of time investments are expected to be held for, and the amount of risk willing to be taken. The last objective should be a target or maximum spending rate.
2. Delegation of Duties – Identify the duties and responsibilities of the parties involved in the investment process; those parties should at a minimum include:
• board of directors
• finance committee or investment committee; whichever one is applicable
• investment manager
• custodian
3. Investment Strategy and Asset Diversification – This is the most important part of developing the investment policy as it sets the play book for how the organization’s funds will be invested.  The strategy should take into account the risk associated with each investment class and how the investments relate to the risk tolerance of the organization.  The best way to lay out investment strategy and asset diversification is by developing a table that shows the asset classes (equities, fixed income, etc.) and ranges of your asset allocation.
4. Spending – A spending policy is typically developed within the investment policy.  When developing the spending policy, keep in mind any regulations that need to be taken into consideration.  For example, organizations with endowments must follow Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) in 49 states.  Pennsylvania is the only state that does not follow UPMIFA, but instead follows PA Act 141
5. Monitoring – The organizations’ investments should be monitored with regular communication to the board of directors.  The investment policy should be reviewed on a regular basis to insure that in keeps the risks in check while growing the organizations funds.