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How to start investing as a charity

Find out how to start investing as a charity, what is an investment policy statement and what regulations should you be aware of before investing.

As a charity, choosing to invest can be a powerful way to generate funds and secure long-term financial stability. With the right planning and risk management, you can make informed investment decisions that support your charity financially while also aligning your goals. This article will help you to start investigating if investing is the right choice for your charity.

Reasons for charity investment

When charities have money, they do not plan to spend in the short-term, they often keep it in a bank savings account. This is a low-risk option since most banks are protected by the Financial Services Compensation Scheme (FSCS). The FSCS is the UK’s deposit guarantee scheme and protects eligible deposits of up to £85,000. 

 

Savings vs investing for charities

However, the downside of keeping money in a savings account is that they often offer lower interest rates, meaning you will not earn as much money back in interest. Also, inflation can erode the purchasing power of your money over time, so when you eventually decide to withdraw your savings, your money might not buy as much as it did when you first deposited it.

Investing, on the other hand, can allow your money to appreciate over time because, instead of saving it you are using it to purchase assets that can increase in value. For example, investing in company shares gives you ownership of a small fraction of that company. As the company grows, so might the value of your shares, offering an opportunity for returns in the future.       

 

Why should a charity invest?

As a charity, it is important to manage your funds in a way that maximises their value. Investing can be used as a tool to keep your moneys value  from falling while also generating healthy potential returns.

Having your money passively increase can help your charity's financial stability, generating revenue that can be used for unexpected circumstances or future costs. Investing can offer a new stream of income that requires relatively minimal active effort. Once you have chosen where you want to invest, you can simply wait and let your money do the work.

Another benefit of investing is that you can make a difference to the companies included in your portfolio. They can use the money to scale their business, before returning it to you with interest. This means that you have the power to support worthwhile projects with your funds.

Different investment strategies:

 

Asset types

When choosing to invest there are several asset types you can choose from that vary by risk and reward potential, each having unique challenges and benefits:

  • Equities: also known as stocks and shares, these represent partial ownership of a company. It means you are buying a small fraction of a company with the expectation that it will grow and therefore increase the value of the fraction you own. 
  • Bonds: Investing in bonds is essentially lending money to the government or a company. You receive regular interest payments while holding the bond, then the initial loan is usually paid back once the bonds term ends. While corporate bonds generally offer better returns, they also carry a higher risk if the issuer defaults with payments or faces bankruptcy.
  • Property: Investing in property could mean buying and managing a property yourself, or investing in a company or property fund. This is where your money is combined with other investors to own the property. Since property values can fluctuate dramatically and unforeseen management costs can occur, this type of investment is recognised as high risk. Selling back your property when you wish to  liquify your earnings can also be a slow process compared to other assets. Moreover, property investments in the UK are subject to taxes like Stamp Duty and potential Capital Gains Tax, which can reduce your returns.

Short-term and long-term investment strategies

One important aspect when choosing to invest is understanding whether you should be focusing on short-term liquidity strategies or long-term growth strategies. To benefit from investments, you must ensure you can keep your funds invested for an appropriate timeframe as they need time to generate value.

Ensure you have enough money to manage your immediate financial obligations, including wages, bills and short-term debts. When you are comfortable with these and have an appropriate emergency fund, you could consider investing any additional savings.

Charity investment risks

Although potential returns can be high, it is important to understand there are always risks when investing. Understanding them beforehand is crucial to making informed decisions.

Risk appetite

Risk appetite is the potential risk an investor is willing to take to pursue their financial goals. There is a trade-off between the potential returns you can make investing and the risk of losses. If your charity has a healthy financial reserve, you may be more inclined to take higher-risk investments since potential losses are less likely to impact your operations overall.

If a charity has low financial reserves, they may want to focus their attention on preserving capital and generating income with low- risk solutions. The UK Charity Commission stresses that Trustees should ensure all investments align with their objectives and risk tolerance.

Diversification

Spreading investments across multiple asset classes and companies can ensure you are not putting all your eggs in one basket. It means that while you are accepting some risk, this risk is spread across multiple factors.

Professional advisers

Speaking with a professional adviser can help you make sure your portfolio is in line with your charity’s risk appetite and objectives. It also means you can receive expert advice that is tailored to your needs, with ongoing management to ensure your investments are getting devoted attention. Keep in mind that advice may come with a cost.

Charity Investment Suitability

Your charity’s investment suitability will depend on several factors, including financial health and cash-flow needs. If your charity’s expenses and cash inflow are inconsistent then you will want to prioritise maintaining an appropriate cash reserve to cover potential unexpected expenses before considering investing.  

Consider how much liquidity you may need in the the short-term to manage cash flow needs. Once this is accounted for you can allocate the remaining funds for long-term savings and investments. When investing, you must be prepared to leave the funds invested for several years to give them time to return a profit.

Sustainable and responsible investing funds

As a charity investor, it is imperative that your portfolio does not contradict your mission or ethical obligations. Donations are received based on your specific purpose, so it is important that you honour this when developing an investment portfolio. 

This could mean investing in renewable energy, climate action or healthcare or avoiding investments that may conflict with your goals. Ultimately, choosing sustainable and responsible investment funds can help ensure you stay in line with your objectives and keep stakeholders happy.

The importance of an investment policy statement

An investment policy statement (IPS) serves as a governance tool that defines how a charity investor will manage its investments. It outlines the objectives, risk tolerance, asset allocation, ethical guidelines and performance evaluation. It helps demonstrate accountability to stakeholders, including regulators, donors and beneficiaries.

How to invest as charity

As a charity it is important to understand how to invest, whether you choose to manage these investments or bring in a professional adviser. This will help you ask the right questions and make the best choices when investing. 

1.  Asses your charity investment fund

A charity should first determine how much liquid assets they need available and whether they have an adequate amount to invest after that. Make sure these funds can stay invested without causing the charity any financial distress.

2.  Complete your investment policy statement

Draft your IPS and use it to guide you through the investment process. You should ensure that all your investment decisions align with your mission, objects and risk tolerance. 

3.  Research the market

Researching the market is crucial to you making informed decisions that maximise potential returns and avoid taking on inappropriate risk. This research will be an ongoing process to ensure your charity adapts to economic conditions and regulatory requirements.

Charities must comply with the Charities Act 2011, Charity Commission guidance and if relevant the Trustee Act 2000, which governs investment powers. Trustees should keep a record of their investment decisions to serve as proof of compliance with their legal duty of care. The Charity Commission produces useful Guidance under CC14.

4.  Create a trustee investment plan

Creating a trustee investment plan ensures you have determined exactly how you plan to invest, including specific tasks and responsibilities within the team. You must ensure that investments continue to align with your IPS, charity goals and regulatory changes. While your IPS offers broader rules and guidelines for your charity investments, the trustee investment plan is more about the practical execution of these the investment strategies. Adhering to both will contribute to your portfolio being managed adequately to minimise risks of losses. 

5.  Monitor your investments

Regularly review your portfolio and market conditions, analysing its performance and adjusting where necessary. This helps you to track the returns on your investments and avoid losses. 

Guidance and support options for your charity investment

Navigating investing as a charity can be complex. Without experience it can be difficult to know where to invest or what regulations you must consider. Charities have the additional challenge of ethical and legal boundaries. Seeking expert advice can help you maximise your returns while also helping you to follow correct procedure.

If you are thinking of investing as a charity then our guide to charity investment will help get you started.

For more detailed advice tailored to your charity’s specific needs, you can contact our dedicated experts team at:
T: 03000 123 3444
E: clientrelations@cafonline.org