Managing Investments As A Charity Or Nonprofit

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Managing Investments As A Charity Or Nonprofit
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Maintaining financial viability is a constant challenge for charities and nonprofit organizations.

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The past year has underscored that challenge. The pandemic has not just affected investment returns – it’s also had serious implications for charitable activities and the ability to fundraise. For some organizations, it’s even raised doubts about whether they can continue to operate.

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Finding ways to generate long-term, sustainable returns for your nonprofit organization has become more important than ever.

But don’t invest money just because it’s there.

Do your research and invest strategically. Find opportunities that will help your organization realize both immediate and long-term goals while aligning with your values.

Strategic investment will result in:

  • Maximization of long-term funds
  • Creation of a reliable, sustainable income source
  • Potential financial growth for future expansion
  • Protection of funds against inflation
  • Generation of better returns than bank-held cash

Questions to Ask Before Investing

Will the investment align with our mission and goals?

Will it help meet our financial goals?

Does it align with our policies on ethical investment?

How long should we plan to invest in it?

Is it within our acceptable risk level?

Establishing Your Risk Tolerance

Any type of investment – even a straightforward cash deposit - entails both potential reward and risk. Defining your risk tolerance level is about determining the balance that will best align with your organization’s goals.

Consider multiple factors – from your comfort level with potential fluctuations in the value of your organization’s assets, to how quickly you may need to liquify your assets down the road.

Your potential risk level is largely determined by how you choose to allocate your assets.

Asset Allocation Options

When you spread investments over different asset classes – and even across different parts of the globe – you avoid the concentration of volatility and risk in one specific area.

One of your goals with respect to investment should be to derive a regular dividend or income that can cover most or all of your operational expenses including your spending on software tools like CRM, or any other IT software, salaries, utility payments, etc.

The good thing is that nonprofits and charities often get a discount on these tools - so your expenses are relatively much lower, to begin with.

Among the options:

  • Cash: low-risk level, but also low returns due to low interest
  • Bonds: a government or corporate “IOU” which is paid back to the investor with interest on maturity. The risk level is lower than for equities, but be aware that current interest rates are particularly low. It’s important to note that some of these loans have riders specifying how these monies can – and cannot – be used. Not all will be eligible for investment.

Low-interest bonds can be useful in two ways. They can be reinvested in other assets that garner higher returns. Additionally, bond financing allows organizations to direct their fundraising efforts into debt reduction, endowments, and other projects.

  • Equities: also known as stocks and shares, they represent a stake in a company’s capital. If the company does well, so does your investment. But the reverse is true as well – which means that while there’s higher potential ROI, it’s accompanied by higher risk.
  • Property: there are options to buy and manage property, buy shares in property management companies, invest in residential or commercial properties, or in property management funds.  There is potential for higher ROI than from cash or bonds – but also for greater risk due to fluctuations in property prices and rental demand.
  • Microloans: If you are a nonprofit or charity that is qualified to offer microloans to small businesses, this can be a win-win opportunity to both your organization as well as the small businesses you are contributing to.
  • Alternatives: these include hedge funds, commodities, and private equity. While these offer higher potential rewards, they also frequently involve higher costs and generally higher risk than the more conventional asset types.

Investment Management A-B-C's

  • Think about your organization’s objectives. Determine the ways in which you want your investments to connect with your organization’s goals and strategy delivery.
  • Think about the range of investments. There are different types of returns that can be measured in different terms – whether social, financial, environmental, or other. Consider what is best for your organization.
  • Create a clear investment strategy that establishes which assets will be invested, how they will be managed, and how they will be monitored
  • Focus on mixed-asset managed portfolios. Analyze the funds in each, including where the funds are invested.
  • List the pros and cons of each portfolio, factoring in management fees, payment schedules, rates of return, accessibility, etc.
  • Make use of online tools to expedite your efforts. Many options – including cash flow forecasts, budgeting templates, risk assessment templates, and property management apps – are available for free or at discounted rates for charities and nonprofits.
  • Be transparent about investment decisions. Use media releases and website postings that will allow regulators, lenders, and donors to see where the money is going.
  • Regularly review investment performance.

Reviewing Investment Performance

What were your performance expectations, and did your funds meet them?

Are the returns delivered the results you need to support your objectives?

Are you taking too much risk, or too little? If too much, can you accept the risk? If too little, can you accept the loss?

You must regularly monitor your organization’s investments to ensure they’re continuing to help you reach your objectives. For many investors, investing via an online account is the easiest way for them to stay current with their portfolio.

When investing in funds, your decisions should be based on accurate, up-to-date information. Make a point of regularly checking the performance of both the fund and fund manager against established benchmarks.

You’ll also need to assess the level of risk the fund is incurring. A good way to keep track is to check in periodically with a dedicated research agency that produces historical performance data and fund/manager ratings. Note that funds with a higher risk rating tend to be more volatile and experience abrupt shifts in value – so they require monitoring over a longer-term than low-risk funds.

The Long View

Be prepared to wait to see positive results. Investments for your nonprofit organization take time to bear fruit, so it’s not likely that you’ll see a sudden influx of cash.

Even when an investment appears to be yielding good results, it’s best to wait it out to see how it performs in the long run. Start modestly, then increase your investment once you’re confident of a solid, sustained performance.

And remember that however modest the return, it’s still more than you started with – and it will help your organization keep its doors open and move forward on its path.

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