Karen Houghton
April 19, 2023
Finance

The prospect of investing your nonprofit’s funds can seem daunting—but it doesn’t have to be. With the right foundation, nonprofit investing can help you diversify your revenue streams, build up your reserve fund, and provide long-term financial sustainability so you can keep working towards your mission.

In fact, high inflation rates mean that any uninvested money kept in savings accounts is actually losing value over time. To retain the value of your donations and potentially increase them, start looking into investing. Use these three keys to start off on the right foot. 

1. Understanding investment basics 

Before setting up an investment account or even looking for an advisor, it’s important to understand exactly what investing looks like for nonprofits. Here are just a few of the investment basics you should be aware of:

  • Which taxes you’re exempt from: Nonprofits’ 501(c)(3) status makes them generally exempt from income and capital gains taxes on investments. This means that your nonprofit can put more of your investment earnings towards your reserve fund or programs. 
  • What you can invest in: Your organization can invest in stocks, bonds, treasury bills, and more. An investment advisor can help you create a diversified portfolio that aligns with your nonprofit’s financial situation and goals.
  • Where to invest: You can choose to invest your funds through banks, wealth advisors, or specialized nonprofit investment advisors. It’s also possible to manage investments yourself, but this isn’t recommended due to the level of difficulty and risk involved. 

It’s also crucial to understand the role of a Registered Investment Advisor (RIA). RIAs are fiduciaries, meaning they’re legally obligated to work in your best interest. As you start doing research on who to work with and where to invest, make sure to prioritize RIAs.

2. Working with a nonprofit investment advisor

One of the best ways to get the most out of your investments is to partner with someone who understands your unique situation. An RIA that specializes in nonprofit finances is likely to have a better grasp on your organization’s needs than banks or wealth advisors. 

Nonprofit investment advisors can help you set goals, create an Investment Policy Statement, and choose from low-risk portfolios and index funds with the goal of seeing gradual returns to support your mission. Since they specialize in working with nonprofits, they also know how to align investing strategies with your nonprofit’s values, such as by leveraging impact investing.

3. Developing a thorough Investment Policy Statement

Once you’ve chosen an advisor, the final key to start investing with a strong foundation is your Investment Policy Statement. This is a document that outlines and guides how your nonprofit will invest your funds. A thorough Investment Policy Statement protects you, your board, and your finances.

With the help of your advisor, ensure that your statement includes clear:

  • Goals: Outline the reason for creating your investment portfolio, what you intend to do with the earnings, how much you aim to earn, and how much or how little you plan to risk.
  • Policies: Set guidelines for the types of investments your nonprofit can make, including the level of risk allowed. Then, create spending guidelines for how the funds can be spent, when, and by whom. 
  • Roles and responsibilities: Detail who will oversee your investments and what their responsibilities are. This section should also include any restrictions for your investment advisor, staff, and board. IRS tax-exemption requirements state that board members and staff cannot benefit from nonprofit investment earnings, so they should not be directly involved in the management.
  • Reporting plans: Explain how you’ll track and disclose your investments’ performance, along with who will be responsible for reporting.

Lastly, your Investment Policy Statement should include a statement about your commitment to honoring all donors’ wishes for how their donations are used. 

Entering the world of nonprofit investing opens up a wealth of possibilities for maintaining healthy reserve funds and increasing your overall fundraising potential. Once you get comfortable with investing your own funds, you can consider widening your financial prospects further by accepting noncash gifts like stocks and cryptocurrency from donors. Many of your donors are likely looking to the future of giving, and you should be too. 

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