Investment Policy Statement — CFP IPS

An Investment Policy Statement (IPS) is the written agreement between client and adviser specifying the portfolio's purpose, constraints, allocation, monitoring, and review schedule. It is the contract that survives market regimes — when the bear arrives, the IPS reminds both parties what was agreed. SEBI IA Regulations require RIAs to maintain IPS for every client. CFP candidates must master both drafting and use.

Foundation

IPS structure (RRTTLLU framework + components): 1. Client profile (age, income, dependants, employment) 2. Goals (specific amounts, dates, priorities) 3. Constraints (Risk capacity vs tolerance, Return target, Tax considerations, Time horizon, Liquidity, Legal/regulatory, Unique circumstances — RRTTLLU) 4. Risk objective (return target + risk tolerance + risk capacity) 5. Asset allocation policy (target % per asset class with bands) 6. Investment selection criteria (categories, fund types, prohibited investments) 7. Performance monitoring (benchmarks, review frequency) 8. Rebalancing rules (calendar or threshold-based) 9. Reporting cadence and content Sign with date by both client and adviser. Update at material life events.

Deep Dive

IPS for typical mid-career Indian client: Return objective: Real corpus growth + retirement target. Quantify: ₹X cr in today's rupees by age 60, requires ~10-12% nominal returns over horizon. Risk: Moderate — can tolerate 30% drawdown emotionally; can afford 35% via diversified portfolio without compromising goals. Time horizon: 25 years to retirement. Education goals shorter (10-15 years). Tax considerations: Old/new regime decision; ELSS for 80C; LTCG management on equity; debt fund post-2023 slab-rate awareness. Liquidity: 6 months expenses in liquid fund (₹10-15 lakh typical). Legal: None typically for retail; HUF or trust structures for HNW. Unique: Education goals (15-year), house upgrade (5-year), parents' health insurance. Asset allocation policy: Equity 60-70% (Multi-cap + Large-cap + International) Debt 25-35% (PPF + EPF + Short-term debt funds) Gold 5% With ±5% bands for rebalancing. Rebalancing: annual or 5% drift threshold. Review: annual + life-event triggered.

Worked example

Worked example — IPS for Mr. and Mrs. Ramani, ages 42 and 40 [Excerpt from IPS document] Client: Ramani, Avinash and Vidya Date: October 2024 Review: Annual or upon material life event Family: 2 children (ages 12 and 9) Income: ₹35 lakh (combined annual) Net worth: ₹2.4 cr (excl. primary residence) Goals: 1. Children's education (UG + PG): ₹40 lakh in 7 years (eldest), ₹50 lakh in 10 years (younger) 2. Retirement (combined corpus): ₹6 cr by age 60 (in today's rupees) 3. Home upgrade: ₹50 lakh in 5 years 4. Wealth building / discretionary: ongoing Return objective: 10-12% nominal across portfolio over 18-year horizon Risk capacity: Above-average (high income, paid-off home, no major debts) Risk tolerance: Moderate-to-aggressive (clients survived 2020 with portfolio intact) Required return: ~9% nominal, achieved via 65/35 equity/debt mix Asset allocation policy: Equity 65% ± 5% (large-cap 30%, multi-cap 25%, mid-cap 10%) Debt 30% ± 5% (PPF + EPF + short-term debt) Gold 5% (SGB + ETF) Rebalancing: annually in March, or whenever any class drifts more than 5% from target. Prohibited investments: ULIPs, endowment plans, structured products, single-stock concentrations >5% of portfolio. Review signal: bear-market drawdown >25%; bull-market rally >40% in single year. Signed: Avinash Ramani, Vidya Ramani, Trustner Adviser Date: October 2024

Real-world scenario

Real-world scenario — IPS during pandemic Ms. Lakhotia's IPS, signed in 2018, specified 70/30 equity-debt with 5% rebalancing band. March 2020 — NIFTY crashed 35%. Her allocation drifted to 55/45. She called her CFP in panic: "Sell everything! Wait until market stabilises!" CFP's response — pulled out her IPS: • "Look, we agreed in 2018 to 70/30 with rebalancing rule." • "Per IPS, we should be buying more equity, not selling." • "You were prepared for this scenario; the IPS reminds us of that preparation." • "Selling now locks in losses. Holding through is the plan we agreed." Ms. Lakhotia hesitated, but the documented IPS gave her something to anchor on. She agreed to follow the rebalancing rule rather than panic-sell. 12 months later, her portfolio was up 22% from the bottom. Without the IPS: she would have sold at the bottom, missed the recovery, lost ₹15-20 lakh in opportunity cost. The IPS isn't paperwork. It's a behavioural anchor that pays for itself in one major market event.

Advanced

A practitioner-grade insight: an IPS is most useful at the moment of stress — when client wants to deviate. Have a printed copy in client file with client's signature; pull it out when client says "should we go to 100% cash?" The IPS is your protection AND theirs — it depersonalises the conversation. Update the IPS at major life events (within 30 days of the event), not at every market move. Annual review is mandatory; flag changes via track-changes for client review. IPS evolution as client matures: • Year 1: comprehensive document, signed by both parties. Acquaintance phase. • Year 3: review, refine based on observed reactions to market moves. • Year 5: major review. Risk tolerance may have shifted (positive or negative). Update. • Year 10+: IPS becomes living document. Multiple updates over decades. Documentation discipline: keep dated copies of every version. Demonstrates your due diligence in case of dispute. SEBI IA inspections review IPS retention.

Regulatory references

SEBI IA Regulations 2013 — IPS requirement
CFA Institute curriculum on IPS
FPSB India Capstone (Module 5) — IPS as core deliverable
AMFI Best Practices on advisory documentation

Common mistakes & pitfalls

Verbal agreements without written IPS — no anchor in stress moments.
Generic IPS template not customized to client.
Failing to update IPS after life events.
No client signature — limits legal weight.
IPS gathering dust — never referenced in client meetings.

Frequently asked

How often should the IPS be reviewed?

Annual review minimum. Major life events (job change, marriage, children, inheritance, divorce, near-retirement) trigger off-cycle review. Avoid quarterly tweaks based on market moves — defeats the purpose.

Should the IPS be sent to the client or signed in person?

Both options work; signed in person creates stronger commitment. Modern e-sign tools (Aadhaar OTP, DocuSign) work for digital. Critical: client must read it, not just sign. Walk through every section.

What if the client's risk tolerance changes after the IPS is signed?

Update the IPS. Document the conversation, the trigger event (e.g., "client experienced 30% drawdown in 2022, found it more uncomfortable than expected"), and the revised allocation. Revised IPS supersedes old. Keep all versions.

Practice questions

Click each question to reveal the answer and explanation.

Q 1

IPS framework "RRTTLLU" stands for:

(a)Risk, Return, Tax, Time, Liquidity, Legal, Unique
(b)Rebalancing, Returns, Tax, Time, Liquidity, Lock-in, Unique
(c)Real, Real, Tax, Time, Liquidity, Legal, Unique
(d)Risk, Reward, Tax, Time, Liquidity, Long-term, Unique

Correct: (a) Risk, Return, Tax, Time, Liquidity, Legal, Unique

RRTTLLU: Risk objective, Return objective, Tax, Time horizon, Liquidity, Legal/regulatory, Unique circumstances. Standard CFA/CFP framework for IPS constraints.

Q 2

A material change in client circumstances should trigger:

(a)Wait for annual review
(b)Off-cycle IPS update
(c)Sale of portfolio
(d)No action

Correct: (b) Off-cycle IPS update

Material life events — job loss, marriage, child birth, inheritance, divorce — trigger immediate (within 30 days) IPS update. Document the trigger.

Q 3

The IPS is most useful:

(a)At account opening only
(b)Annual review only
(c)When client wants to deviate from the plan during stress
(d)For regulatory filings only

Correct: (c) When client wants to deviate from the plan during stress

IPS is most valuable in stress moments — depersonalises the decision, anchors to original commitment, prevents panic-driven errors.

Q 4

A signed IPS:

(a)Has no legal weight
(b)Provides documentation of agreed strategy and serves as defence in case of dispute
(c)Replaces all other agreements
(d)Eliminates need for KYC

Correct: (b) Provides documentation of agreed strategy and serves as defence in case of dispute

A signed IPS documents the agreed strategy, demonstrates due diligence by the adviser, and serves as evidence in case of dispute. Strong legal weight when properly executed.

Q 5

CFP-grade IPS for a 35-year-old with 25-year retirement horizon:

(a)Should be 100% equity
(b)Should be 100% debt
(c)Should reflect specific risk tolerance and goal mix, typically equity-heavy
(d)Should be standardized across all clients

Correct: (c) Should reflect specific risk tolerance and goal mix, typically equity-heavy

25-year horizon allows equity-heavy allocation (typically 65-80%). Specific mix depends on client risk tolerance, capacity, and other goals. Customised, not standardised.

Educational purposes only. The numbers, returns, and examples used in this lesson are illustrative. Past performance does not guarantee future results. Mutual fund and securities investments are subject to market risks. This lesson is not investment advice; for advice tailored to your circumstances, consult a SEBI-registered Investment Adviser. Read our full disclaimer.