What critical elements should an investment policy include?

An investment policy is crucial for guiding the investment activities of a financial institution, such as a credit union. It provides a framework to ensure that investments align with the organization’s objectives while managing potential risks effectively. Including risk categories, such as Interest Rate and Credit risk, is essential because it helps the organization identify, assess, and manage the various risks associated with its investment portfolio.

Interest Rate risk pertains to the potential for investment values to fluctuate due to changes in interest rates, which is especially important in a rising or falling interest rate environment. Credit risk involves the likelihood that a borrower or counterparty will default on their obligations, which is vital for evaluating the creditworthiness of investments made by the credit union.

By addressing these risk categories within an investment policy, the credit union can establish guidelines to mitigate potential adverse impacts on its financial health, ensuring long-term stability and adherence to regulatory requirements.

Other options may include important information for an overall investment strategy, but they do not capture the fundamental necessity of assessing risk within an investment policy context. Short-term goals and liquidity strategies, for example, address timeframe and resource availability but do not dive deeply into the inherent risks investments might carry. Market trends and transaction volumes provide valuable insights for decision-making but lack the critical focus on