How to prepare an investment statement

Are you one of those investors who spend sleepless nights worrying about the volatile stock markets and resultant effect on your portfolio? Are you an impulsive decision maker when it comes to your investments? Are you unsure if you will have enough money for your future goals? If yes, then an investment policy statement may just be the right thing for you.

First let us understand what an investment policy statement is. An investment policy statement or IPS, in financial parlance, is a document drafted between an investment advisor and her/his client. This document outlines the investment philosophy, guidelines and procedures to be adhered to by both the advisor and the client. It takes into consideration the goals and objectives of the client, risk tolerance level, liquidity requirements and asset allocation to decide the right investment portfolio for the client.

If you are preparing an investment policy statement, certain important aspects as outlined below need to form a part of it.

The author is chief evangelist, Perfios

Goals and objectives

Investment without an objective or goal is like a journey without destination. Unless you know where you have to reach, how would you know the best route to get there? Hence, list out the important milestones in your life for which you need to prepare in advance and also determine how much money will be required at that point in time.

For example, if you need to plan for your daughter's marriage 10 years away, given the cost of marriage today and inflation, you can find out how much money you would need after 10 years.

Putting down goals will also help you distinguish between the ones that are short term and those which are long term. This bears significance in deciding a proper investment strategy.

Knowing your risk tolerance level

You may not be the best judge of how much risk you can take with respect to your money. Getting the help of a professional like a financial planner or advisor is recommended. It would depend on various factors such as your age, financial situation, income levels, timelines for important goals, attitude to risk, past investment decisions and the like.

A risk assessment exercise is crucial in deciding the asset allocation for your investments.

Asset allocation plan

Goals and risk appetite are two crucial factors in determining the asset allocation strategy. Asset allocation is a process of deciding the proportion of investments in broad asset classes such as equity, debt, real estate, gold etc.

Asset allocation is important because it is never a good idea to put all your eggs in one basket. Diversification into different assets will reduce the overall risk. Asset allocation should be in line with the risk appetite of an individual. The asset allocation of a conservative investor will be quite different from that of an aggressive investor.

Individual investments within the asset classes

Once the asset allocation is decided, next comes the task of selecting suitable investments within each asset class. For example, for equity asset class one can choose to invest in shares or equity mutual funds.

For debt, one can look at bank fixed deposits, debt mutual funds or post office schemes. Some of the factors to be analysed while selecting products is investment time frame, tax efficiency, costs and returns.

In addition, depending on the nature of the investment, specific due diligence may be required. For example, while investing in shares of a company, you may want to assess its financial ratios, management team, past performance etc.

Monitoring the investments

Once the investment plan is implemented, monitoring plays a crucial role. Monitoring is the key to ensure that investments are kept on track with respect to your plan. Booking profits, cutting losses and exiting duds from the portfolio is extremely important to maintain a healthy portfolio.

With diverse set of investments in one's portfolio, maintaining the portfolio online and ensuring that it is always updated has become a necessity. Use any online tool to keep a track of all your investments viz. shares, mutual funds, insurances and fixed deposits.

You need not visit your portfolio on a daily basis but set a periodic review routine and stick to it. An online portfolio aids quick decision-making and helps identify signals for any changes that may be required.

Review the plan

A yearly review of the overall plan is necessary to check if goals or risk profile has changed. Performance of investments will also determine the future strategy.

Ensuring all of the above may be challenging given the time and knowledge constraints of an average investor. Hence, expert help is always recommended. A specialist like a financial planner or advisor is better informed and can provide timely valuable inputs.

Having an investment policy statement makes you more organised, pragmatic and unbiased in your decision-making, which otherwise may be driven by emotions. It helps you focus on your goals as well as monitor whether your investments are on the right track. It doesn't guarantee that you will meet all your goals, but you would definitely be very close.