Investment Policy Statement: what goes in it
Two objectives, five constraints, one document every later decision is checked against.
An Investment Policy Statement (IPS) is a written agreement between the client and the person managing or advising on their money that sets out what the portfolio is for, how much risk it may take and what limits apply. It is the reference point every later decision is checked against.
In XXI-A it sits in Chapter 9, and questions usually ask you to sort a client's facts into the right box: is this an objective or a constraint, and which constraint?
You save ₹100
- Full-length mock tests
- Chapter-wise question bank
- AI study plan
One payment, no subscription · Valid for 1 month
The two objectives
- Return objective
- What the portfolio needs to earn, stated as a rate or an amount, after inflation and taxes where relevant. It should follow from the client's goals (a ₹1.5 crore retirement corpus in 12 years), not from a wish for "the highest return".
- Risk objective
- How much fluctuation and loss the portfolio may take. It combines ability to bear risk (income, wealth, time horizon, obligations) and willingness to bear risk (the client's attitude). When the two disagree, the lower one usually governs.
The five constraints
Constraints limit how the objectives can be pursued. Textbooks group them as liquidity, time horizon, tax, legal and regulatory, and unique circumstances.
Liquidity
What it covers
Cash the client will need: near-term goals, an emergency reserve, and flexibility to act on opportunities
PMS example
₹15 lakh needed for a daughter's admission in two years
Time horizon
What it covers
How long the money can stay invested; may have stages
PMS example
10 years to retirement, then 25 years of drawdown
Tax
What it covers
How interest, dividends and gains are taxed for this client
PMS example
A high-bracket client who prefers growth over regular income
Legal and regulatory
What it covers
Rules that apply to the investor or the money
PMS example
A trust whose deed restricts investments; an NRI's account type
Unique circumstances
What it covers
Personal, ethical or religious preferences
PMS example
No tobacco or alcohol stocks; no holding in the employer's shares
| Constraint | What it covers | PMS example |
|---|---|---|
| Liquidity | Cash the client will need: near-term goals, an emergency reserve, and flexibility to act on opportunities | ₹15 lakh needed for a daughter's admission in two years |
| Time horizon | How long the money can stay invested; may have stages | 10 years to retirement, then 25 years of drawdown |
| Tax | How interest, dividends and gains are taxed for this client | A high-bracket client who prefers growth over regular income |
| Legal and regulatory | Rules that apply to the investor or the money | A trust whose deed restricts investments; an NRI's account type |
| Unique circumstances | Personal, ethical or religious preferences | No tobacco or alcohol stocks; no holding in the employer's shares |
A short IPS for a ₹75 lakh discretionary client
Rakesh, 45, a salaried professional, is moving ₹75 lakh of savings into a discretionary equity PMS. He has ₹25 lakh in liquid funds and FDs and no loans except a small car loan.
Return objective: grow the corpus to fund retirement at 60; a long-run return above inflation by a clear margin. Risk objective: above average ability (15-year horizon, stable income, separate emergency fund) and average willingness (he sold in panic in 2020), so moderate to above average overall. Liquidity: low from this portfolio, since the emergency reserve is held elsewhere. Time horizon: 15 years. Tax: resident individual, high bracket. Legal: none special. Unique: he asks that no stocks of his employer's group be bought.
The last item is a restriction the portfolio manager must record. SEBI's rules require the PMS agreement to state the client's investment objectives and any restrictions on investing in a particular company or industry (Regulation 22(2) of the SEBI (Portfolio Managers) Regulations, 2020).
Free account, this exam preselected.
IPS versus the PMS documents
The IPS is a planning tool from portfolio management practice. SEBI does not prescribe an IPS format for portfolio managers. The documents SEBI does require are the disclosure document, the client agreement and the MITC; a well-written IPS makes it easy to check that the agreement and the chosen investment approach fit the client.
How XXI-A tests this
Patterns in IPS questions and the traps inside them:
- checkClassify a fact: "needs ₹10 lakh for a wedding next year" is a liquidity constraint, not a return objective.
- checkEthical or religious exclusions are unique circumstances. The trap answer tells you to override them for better returns.
- checkAbility and willingness differ: the conservative answer (the lower of the two) is usually right.
- checkTax belongs inside the IPS because different income types are taxed differently. "Tax is the portfolio manager's concern only" is false.
- checkThe IPS is reviewed when circumstances change, not written once and filed.
FAQs
What is an investment policy statement?expand_more
A written document that sets out a client's return and risk objectives and the constraints on the portfolio (liquidity, time horizon, tax, legal and regulatory, unique circumstances). It guides every investment decision and review.
What are the constraints in an IPS?expand_more
Liquidity, time horizon, tax, legal and regulatory factors, and unique circumstances such as ethical preferences. They limit how the return and risk objectives can be pursued.
Is an IPS mandatory for PMS in India?expand_more
SEBI's portfolio manager rules do not prescribe an IPS. They do require the client agreement to state the investment objectives, the investment approach and any client restrictions, which is the ground an IPS covers.
How often should an IPS be reviewed?expand_more
Periodically, and whenever the client's circumstances change: a new job, retirement, an inheritance, a large expense or a change in risk appetite.