The Investment Policy Statement (IPS) is an important starting point of goal-based investing: here’s why

📚 Table of Contents

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• What is IPS?
• Why make an IPS?
• What is there in the IPS?
  • 1. Investor information
  • 2. Goal setting
  • 3. Investment characteristics and asset selection (RRTTLLU)
  • 4. Asset allocation and security selection
  • 5. Review and rebalancing plan
• Get the IPS sheet

What is IPS?

The Investment Policy Statement (IPS) is a written document that is the basis of goal-based investing. The IPS is the plan that helps getting started and allows decision making at every step of the investment journey. It avoids ambiguity in decision-making and deals with common situations that the investor faces. If the investor is engaging with a financial planner, then the IPS is the result of the engagement. For DIY investors, this post details how an IPS is made. The IPS should be one of the first things that needs to be done at the beginning of life-stage based investing.

Why make an IPS?

IPS describes the why, how and what of investing. The document exists so that both the advisor and client (or alternatively the DIY investor today and their future self) can unambiguously define

• the purpose of the investment i.e. goals
• how the investments are to be made and in what assets/proportions
• how to deal with market movements, change in the financial condition of the client and change in goals

The IPS answers questions like:

• How to get started with investments?
• What are the goals and what are not?
• Is children’s marriage part of goals? Is PG/PhD education covered? How to handle children’s education goal?
• Is FIRE an objective for the family? Can bucket approach be used to RE? What is the target sustainable savings rate for FIRE?
• How to estimate and plan for retirement using bucket method?
• How should debt/loans be paid off?
• Should the home loan be pre-paid?
• What are the appropriate funds/assets to be chosen and how much to invest in? Is investing in thematic funds or IPOs allowed?
• How and when to review the performance of funds?
• Should investments be happen in active funds or index funds or a mix as core-satellite portfolio?
• Will direct stock investments be allowed?
• What kind of debt funds to be used?
• Should you maximize PPF, VPF, Sukanya Samriddhi every year?
• Is buying another house for investment (not residential) purpose in scope? How about commercial real estate or REITs?
• How to invest large amounts of cash from bonus, inheritance or insurance payout?
• Is investment in gold allowed and in what form?
• What should be the proportion of equity and debt for each goal and when to rebalance?
• What to do if the market falls by 30% in a month? Is the market overvalued and should SIP be paused or funds exited?
• Should investment happen in NPS?
• Is an annuity/pension plan to be considered for retirement?
• What inflation numbers to be assumed per goal and after retirement?
• Which mutual funds are to be avoided at all costs?
• How about new investments like invoice discounting, P2P lending or covered bonds?
• When and how to rebalance and how to manage overall portfolio risk?

The IPS is a “living” document and is the basis for all decision making. If a situation arises that is not covered by the IPS then there are two options based on the impact:

• if there is a large change like deciding to FIRE instead of traditional retirement then the IPS has to be modified
• if the impact is smaller (a tactical investment opportunity in a thematic fund for example) then the change has to be documented for future review (when the IPS will be altered) and the action may be taken after consultation with the family.

The IPS should include one or more Excel models for tracking and investing in goals like this plan.

What is there in the IPS?

The IPS contains these five major sections:

1. Investor information

This section contains the basic details of the investor

• family income and type of profession
• count of earning and dependent family members
• income stability and future prospect
• previous experience in investing
• current assets and investment details (how much invested and where)
• tax status (for example resident taxpayer or NRI)

Some of these details will go into defining the risk profile of the investor.

2. Goal setting

This section contains the details of all the goals: horizon, cost today, inflation and priority. The goal-setting process is covered in detail here. The prerequisites for starting investments will be defined here:

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

3. Investment characteristics and asset selection (RRTTLLU)

Using the RRTTLLU Framework, this section defines the allowed and disallowed investments and assets for each goal based on the attributes of risk, return, time, taxes, legal/regulatory, liquidity and unique circumstances of the investor. This section will deal with questions like what investments are allowed (mutual funds, provident fund) and what is not (for example NPS, direct stocks and covered bonds).

4. Asset allocation and security selection

This section contains details on the asset allocation for each goal. This will also contain how the portfolio will be diversified and the dangers of starting investments late.

5. Review and rebalancing plan

This section contains the goal-wise glide-path and rebalancing plan in order to manage the risk of the portfolio.

Get the IPS sheet

We have a sample IPS template for those readers who wish to create one. You can get it by clicking the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Get the Sheet