Investment planning
In this chapter: Goal setting, time horizon, risk capacity · The IPS document
Investment planning starts with goals (purpose, time horizon, target corpus) and constraints (risk capacity, risk tolerance, liquidity needs, tax considerations). The Investment Policy Statement (IPS) is the written document capturing this. It defines what the portfolio is for, how it will be managed, and the rules for review. Without an IPS, advice becomes ad-hoc.
IPS components: investor profile (age, income, dependents), goals (specific amounts and dates), constraints (liquidity, time horizon, taxes, legal/regulatory, unique circumstances), risk objective (return target and risk tolerance), policy (asset allocation ranges, rebalancing rules, prohibited investments), monitoring (review frequency, performance benchmarks). The IPS is signed by both client and adviser and revisited at least annually or at material life events. RIAs must maintain IPS for every client — SEBI inspections check for this.
An important nuance: the IPS must be specific enough to guide action but flexible enough to accommodate market reality. Common error: writing an IPS with rigid bands ("60-65% equity") that triggers excessive rebalancing in volatile markets, generating tax drag. Better: bands like "55-70% equity" with rebalancing only at boundaries, or strategic deviation rules for tactical opportunities. Master practitioners write IPS that survive market regimes.