How to create an investment policy statement

An investment policy statement, or IPS, explains how a portfolio is managed. It sets out the process before making any investments, considering the objectives and limits involved. Corporate treasurers and fund managers both use an IPS, but for different reasons. Treasurers report to a board and auditors, while fund managers are accountable to investors and a specific mandate.

Without a written policy, whoever is present makes their own decisions on what to do with the cash, which isn't a reliable way to manage an institutional portfolio. This guide explains what an investment policy statement includes, why institutions need one, and how to create your own.

What is an investment policy statement?

An investment policy statement is a formal document that explains how an institution manages its cash and investments. It outlines the portfolio's objectives, the rules it must follow, and who is responsible for each decision. Most institutions see it as a governance tool: the board approves it, and the treasury team follows it in their daily work.

An investment policy statement differs from a broader treasury policy, which covers things like banking relationships and payment controls, along with operational risk for the entire finance team. Our guide to treasury policy explains that wider framework. The investment policy statement focuses on one main question: how should surplus cash and investment capital be used?

Many institutions begin with an investment policy statement template they find online, which is a good place to start. However, a template is only useful if every part matches your own objectives, limits, and risk threshold.

Why an investment policy statement matters

A written policy gives an institution a clear reference point when markets change quickly. It explains in advance how much risk the portfolio can take and what results are acceptable. When decisions are made under pressure, they can stray from the plan, but a documented policy flags these changes before they become issues.

A written policy also reassures people who weren't involved in setting the strategy. A policy that links every investment to a specific goal provides that proof. Our guide to risk-adjusted returns explains one way to check if a portfolio is meeting its policy objectives.

A written policy also preserves continuity. Treasury teams change, board members come and go, and people often forget details over time. A well-written investment policy statement remains useful through all these changes.

The core elements of an investment policy statement

Purpose and scope

Clearly explain why the policy exists and which assets it covers. A corporate treasury policy might apply only to excess operating cash, while a fund's policy could cover all assets. Being specific cuts confusion later and gives new team members a clear way to understand the document.

Investment objectives

List what the portfolio is trying to achieve, in order of importance. Most institutions put capital preservation first, liquidity second, and yield third, but the order can change based on your situation. Avoid vague expressions like "reasonable returns" because they don't give the treasury team clear guidance.

Risk tolerance and constraints

Define how much risk the institution is willing to carry, expressed in terms a treasury team can actually apply. That might mean a minimum credit rating for any counterparty, a maximum exposure to a single issuer, or a ban on certain instrument types entirely. Constraints stated this precisely remove ambiguity from every allocation decision.

Approved asset classes and counterparties

List the investment types and counterparties the portfolio can include, such as US Treasuries, bank deposits, or corporate credit. Many institutions also set limits on how much they can invest with each issuer or in each asset class. We've previously written about why you should pay close attention to concentration risk.

Liquidity requirements

Record how much of the portfolio must be easily available, and how quickly, to cover expected and unexpected cash needs. Base this section on actual payment obligations, not a standard margin from a template. Also, learn how liquidity and safety work together in practice.

Roles and responsibilities

Specify who can suggest an investment, who approves it, and who monitors the portfolio after investments are made. Separating these roles reduces operational and governance risk. It also makes it easier for auditors to see who approved each decision.

Monitoring and review

Decide how often to review the policy, separate from regular portfolio monitoring. Many institutions review it once a year, but faster-changing organizations may need to do it more often. List events like mergers or credit rating changes that should trigger an early review.

How to create your investment policy statement

Writing the document is less about fancy wording than it is about making real decisions clear on paper. Begin by collecting input from everyone involved: the accounting department, the board, and, for a fund, the investors. Their views on risk and liquidity should shape the policy before you start writing.

Write each section using the structure above, making sure every rule is specific enough to guide real decisions. Saying "diversify appropriately" is too vague, but "no single counterparty above 10% of the portfolio" gives the team a clear rule to follow.

Share the draft with the board or investment committee for review and approval before it becomes official. This step is just as important as writing the policy. Without formal approval, policies have no real authority.

Calendar the review date at the point of approval. Set the next review date as soon as the policy's approved. If a policy's never reviewed, it can slowly become outdated and no longer fit the institution's needs.

Other issues to look out for

A frequent problem is constraints that sound firm but can't be tested. "Moderate risk" and "adequate liquidity" mean different things to different readers. That gap defeats the purpose of writing the policy down.

A policy that never changes can be as risky as one that's too vague. Institutions grow, interest rates and goals shift over time. If a policy isn't updated, it may reflect an outdated version of the business. On the other hand, changing the policy every time the market moves makes it less useful as a steady guide.

Another common mistake is treating the policy as just a compliance task instead of a real decision-making tool. If you file the policy away and never use it, it offers no more protection than having no policy at all.

Where TreasurySpring fits

Many rules in a typical investment policy statement are hard to follow if you use only a few banking partners. Limits on counterparties, minimum credit ratings, and liquidity requirements assume you have more options than most treasury teams can access on their own.

TreasurySpring gives institutions direct access to a range of counterparties through one onboarding process. This includes the tri-party repo market, which many policies mention but few teams can reach directly.

This access makes it easier to follow your policy's standards. Each investment matches one counterparty and a set term. This setup makes it simple to report on your policy's limits for each allocation, whether you are a corporate treasurer or part of a fund's investment committee.

If your organization would like to explore how a wider range of counterparties could fit into your investment policy statement, contact our team. 

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.