Nonprofit Investing: A Complete Guide to Growing Your Organization’s Financial Future

Key Takeaways

• Nonprofit organizations can legally invest in stocks, bonds, and other securities while maintaining their 501(c)(3) tax-exempt status
• Only 11.2% of nonprofits currently have investment accounts, missing opportunities to combat inflation and build long-term sustainability
• Creating an Investment Policy Statement (IPS) is essential before opening investment accounts to ensure compliance and alignment with your organization’s mission
• Tax-exempt status allows nonprofits to invest with minimal worry about tax consequences like capital gains
• Working with a Registered Investment Advisor who specializes in nonprofit organizations helps navigate UPMIFA compliance requirements and optimize investment portfolios

What Is Nonprofit Investing and Why It Matters

Let’s start by talking about reserve funds. When I say reserve funds, I’m speaking about the funds which have accumulated that an organization doesn’t plan on spending within the next year or so. Basically, money that isn’t already earmarked for a specific purpose. While many smaller nonprofits operate on a hand to mouth cycle, accumulated reserves is absolutely a best practice when possible. Having reserves will provide your organization flexibility if a grant doesn’t come through or when fundraising doesn’t go quite as well as planned. Likewise, it helps smooth out the inherent lumpiness in revenue / donations that many nonprofits face.

Once an organization has accumulated reserve funds, the onus shifts to being an effective steward of those funds. Being an effective steward means balancing three different priorities:

• Liquidity – The ability to access your funds
• Growth – Making your money work for you
• Safety – Ensuring the value of your portfolio doesn’t drop when you need it most

There’s not a one-size fits all answer for these that will work for every organization. Instead, you have to find the best balance for your specific organization because YOUR needs are different.

Some organizations are better off keeping all their reserves in a high yield savings account; this provides some interest but it maximizes safety and liquidity. You can always access your money and you won’t have to worry about losing value. Others find that investing their reserves in the stock market is the best option. Let’s dig in to some numbers.

A recent study showed that 88.8% of nonprofit organizations keep their reserve funds in traditional savings accounts. This approach earns a minimal amount of interest, but it maximizes safety and liquidity. The downside here is that the purchasing power of the reserves suffers over time, as inflation cuts into the reserve’s value.

Nonprofit investing of reserve funds is a strategic approach to growing organizational assets using a diversified investment portfolio. This enables an organization to preserve capital and keep a specific amount of cash on hand, while earmarking anything above that above that in long-term investments where it can grow.

Unlike for-profit investment strategies focused purely on maximizing returns, nonprofit investing balances financial goals with mission alignment and regulatory compliance. Organizations must consider their nonprofit’s mission, donor expectations, and legal obligations when making investment decisions. The investment strategy is not about growing money for the sake of having more money, but to ensure funding for the organization and ultimately, to increase the impact of the organization.

The hit from only keeping funds in traditional savings accounts is striking. While savings accounts typically offer 0.01-0.5% annual percentage yield, inflation rates have ranged from 3-8% in recent years, with a long term average around 2% per year. This means that a dollar loses purchasing power every year it sits idle. Savings account generally offer the benefit of being fully FDIC-insured, and funds there are always available, however these benefits aren’t enough to justify keeping all reserve funds in cash. For example, an organization with $500,000 in reserves earning 0.1% annually loses approximately $14,500 per year in purchasing power when inflation is 3%, per year.

Take for instance the mid-sized environmental nonprofit that moved $300,000 from savings accounts into a diversified investment portfolio in 2020. By 2024, their strategic asset allocation generated enough additional income to fund a new conservation program. This demonstrates how proper nonprofit investing can have a direct impact on organizational goals. Reserve funds can grow and the earnings can be used for programmatic purposes, while keeping the principal for a rainy day.

The connection between investment income and mission sustainability is even more important during an economic downturn. Organizations with well-managed investment portfolios often weather financial storms better than those relying solely on donations and grants. Investment earnings provide a buffer against reduced funding and help maintain program consistency when other revenue sources fluctuate. A lot of this comes back to having a well-thought out spending policy that provides an organization access to funds when they’re most needed.

Legal Framework for Nonprofit Investing

The Internal Revenue Service explicitly permits 501(c)(3) organizations to engage in investment activities, under Section 501(c)(3) of the Internal Revenue Code. That’s the good news.

The key requirement is that investment activities must further the organization’s exempt purpose, not provide excessive private benefit to individuals.

The private benefit doctrine ensures investments don’t disproportionately benefit board members, staff, or other insiders. In plain English, this means nonprofits can’t invest in businesses owned by board members or enter into investment arrangements that primarily benefit specific individuals. For most organizations, this won’t be a surprise. This should be covered in your organization’s Conflict of Interest Policy. However, organizations can legally invest in publicly traded securities, mutual funds, bonds, and other typical investments without jeopardizing their tax exempt status.

Unrelated Business Income Tax (UBIT) should be considered when thinking about active business investments, rather than passive investment income. Income from stocks, bonds, mutual funds, and similar investments typically qualifies for exemption from UBIT, making these the most common options for nonprofit investment strategies. That said, organizations should consult with qualified advisors if they have concerns about specific investments that might generate UBIT liability.

State-specific regulations add another layer of compliance requirements. Most states have adopted a form of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which establishes fiduciary responsibilities for nonprofit board members managing organizational assets. These laws require prudent investment management and consideration of factors like economic conditions, inflation effects, and the organization’s values, ensuring that investment decisions reflect both the mission and the organization’s values. If you want more detail on UPMIFA requirements, I discuss them in my article on Building an Investment Policy Statement.

Documentation requirements for maintaining tax exempt status during investment activities include proper board resolutions authorizing investment activities, written investment policies, and reporting on Form 990 (Investments are typically listed on Form 990, Schedule D). Organizations must be able to demonstrate that investment decisions focus on increasing organizational impact and comply with UPMIFA regulations. It’s also important to establish reporting standards in the nonprofit investment policy statement to ensure transparency, compliance, and accountability.

Types of Investment Vehicles for Nonprofits

Low-Risk Investment Options

U.S. Treasury Bills currently offer rates between 3.75-5% as of late 2025, providing significantly higher returns than traditional savings accounts while maintaining liquidity and government backing. Treasury bills mature in one year or less, making them a great option for nonprofit organizations that need predictable access to funds.

For nonprofits who want regular, predictable access to funds, one of the simplest options is to build a ladder of Treasury Bills that mature every quarter. This provides known liquidity, while also providing protection against inflation. A Treasury ladder won’t provide the highest return, but it is one of the most predictable and safe options.

Certificates of Deposit (CDs) provide FDIC insurance protection up to $250,000 per institution, offering guaranteed returns for a fixed terms, ranging from three months to five years. The interest rate on a CD is fixed for the duration of the investment, which means nonprofit organizations can accurately predict their expected return throughout that term.

Like with Treasuries, nonprofits can ladder CD maturities to balance higher interest rates with liquidity needs. For organizations with reserves exceeding FDIC limits, it’s possible to spread funds across CDs from multiple banks, held in the same brokerage account. I use Schwab to hold my clients’ funds and Schwab offers access to CDs from a large number of banks. If FDIC insurance is a concern, it’s easy to incorporate CDs from multiple banks to reduce risk from any one particular bank having issues.

Another option for liquid savings is a money market fund. Money market funds offer advantages over traditional savings accounts through (typically) higher yields. These funds invest in short-term, high-quality debt and maintain stable net asset values, making them ideal for nonprofit emergency reserves.

High-grade corporate bonds are another option for generating income while preserving capital. Corporate bonds from highly rated companies provide predictable income streams with maturities that can be matched to organizational cash flow needs.

Growth-Oriented Investment Options

Broad market index funds tracking the S&P 500 or Total Stock Market provide cost-effective exposure to equity markets for long term growth. These funds typically charge low fees (often under 0.10% annually, with some as low as .01%) and offer broad diversification across hundreds or even thousands of companies. Historical returns have averaged 7-10% annually over the last three decades (exact return depends on specific index and time frame), making them a suitable part of a portfolio for nonprofits with longer investment time horizons.

One area I typically stay away from is actively mutual funds. The funds are managed by professional portfolio managers and offer active investment management with the sales pitch of either beating their benchmark or reducing risk. Because their fees are typically higher than index funds (0.5-1.5% annually), I’m not a fan. I follow an evidence-based research approach and most research shows that actively managed funds underperform their benchmark…while charging more.

Exchange-traded funds (ETFs) combine the diversification benefits of mutual funds with the trading flexibility of individual stocks. I already mentioned index funds and most ETFs are built in a similar manner; most ETFs track an index, whether that’s a broad index like the Russell 3000 or a much smaller subset of a larger index, like a S&P Sector fund tracking Industrials or Materials. ETFs typically have significantly lower fees than actively managed mutual funds as well, which is one of the most important considerations when building a portfolio. Overall, they offer solid options for nonprofits looking to implement a targeted asset allocation strategy.

Another option is a target date fund. You’ve likely seen these in a 401k or other retirement plan. Target-date funds are broadly diversified funds that combine both stocks and bonds in the one fund. The cool thing about them is that they automatically adjust asset allocation based on specific timeline goals, becoming more conservative as target dates approach. These funds work well for organizations with defined spending timelines, such as funding specific projects or planned program expansions.

Finally, if you want to build a truly diversified portfolio, you can’t forget international companies. International investments provide global diversification that can reduce portfolio volatility and capture growth in international markets. If you want to dive deep, you can get into the weeds and see how international stocks play a role in Modern Portfolio Theory. International stocks fall into two options: developed market funds offer greater stability, while emerging market investments generally provide higher growth potential with increased risk. You can access international stocks via mutual fund (remember, index funds!) or through various ETFs.

ESG and Mission-Aligned Investing for Nonprofits

First off, Environmental, Social, and Governance (ESG) or Socially Responsible Investing (SRI) is a deep rabbit hole and it’s one that I plan on covering in greater detail on down the road. For now though, I want to provide a high level introduction so you can understand the basics.

At the lowest level, ESG/SRI fund options allow nonprofits to align their investment portfolios with organizational values while maintaining competitive performance. ESG funds screen investments based on sustainability practices, social impact, and corporate governance standards. Performance data shows many ESG funds matching or exceeding traditional fund returns over long-term periods. One thing to know about ESG is that just because it says ESG, or even that it screens for a specific impact, doesn’t mean that it will actually screen to your organization’s standards.

For example, there are many oil-producing companies that have a solid ESG rating, despite the fact their main business is producing fossil fuel. Personally, I have no issue with this, but my job is to educate. If a specific issue is core to your organization’s principles, you’ll want to do your due diligence when reviewing ESG options or find an advisor who knows how to do the due diligence. (For the record, many advisors don’t deal with ESG, so you want to ask questions to make sure they’re familiar with the space and they are willing and able to ensure that the investments they recommend meet your mandate.)

Socially Responsible Investing (SRI) strategies enable organizations to exclude investments contradicting their nonprofit’s mission while focusing on companies with positive social impact. For example, healthcare nonprofits might avoid tobacco companies, while environmental organizations could exclude fossil fuel investments.

Impact investing opportunities provide direct mission alignment by investing in companies or funds specifically designed to generate positive social or environmental outcomes alongside financial returns. These investments can directly advance charitable purposes while building organizational wealth.

Screening strategies help nonprofit organizations avoid investments that contradict their organization’s values or could damage their reputation with major donors and supporters. Negative screening excludes problematic investments, while positive screening actively seeks investments that support the organization’s mission.

The Ford Foundation is an example of an organization demonstrating mission-aligned investing through their commitment to deploy 25% of their endowment toward mission-related investments. Their approach shows how large organizations can maintain fiduciary responsibilities, while using strategic investment choices to make a difference before the funds are ever spent.

Creating Your Investment Policy Statement (IPS)

Investment Policy Statements serves as the foundation for all nonprofit investment decisions. It documents investment objectives, risk tolerance, asset allocation targets, and your nonprofit’s governance procedures. The IPS provides board members, staff, and investment advisors with clear guidelines for managing the organization’s investment portfolio while ensuring compliance with legal and fiduciary requirements.

Essential components include clearly defined investment objectives that connect financial goals to organizational mission. For example, an organization might specify “preserve purchasing power of reserve funds while generating 5% annual returns to support program expansion.” Time horizons should reflect when funds will be needed, with different strategies for emergency reserves versus long term endowments.

Risk tolerance assessment requires honest evaluation of the organization’s ability to withstand market volatility. Like with personal investments, your nonprofit shouldn’t panic and sell when the market pulls back. The IPS should specify maximum acceptable losses and guidelines for rebalancing during market downturns.

Another consideration, similar to risk tolerance, is risk capacity. Organizations with stable revenue streams and substantial reserves can typically accept higher risk in exchange for potentially greater returns, while those with variable funding might prioritize capital preservation and liquidity. This goes back to the tradeoffs I mentioned earlier.

Sample IPS language for emergency reserves might read: “Maintain 6-12 months of operating expenses in liquid, low-risk investments with principal preservation as the primary objective. Target allocation: 60% high-grade bonds, 30% money market funds, 10% Treasury bills.” Maintaining a reserve fund is crucial as a financial safety net for nonprofits, yet many organizations lack investment accounts to grow their reserve funds, missing opportunities for improved financial stability. For endowment growth, language could specify: “Achieve long term growth to support perpetual operations while preserving purchasing power. Target allocation: 60% equities, 30% bonds, 10% alternative investments.”

Board approval processes require formal adoption of the IPS through recorded board resolution, with regular annual reviews to ensure continued alignment with organizational needs. The IPS should specify who has authority to make investment decisions, required approval levels for different types of transactions, and procedures for emergency situations requiring rapid asset liquidation.

Integration with overall financial policies ensures investment strategies support budgeting, cash flow management, and strategic planning processes. The IPS should coordinate with annual financial planning to ensure adequate liquidity for operational needs while maximizing growth opportunities for longer-term funds.

Choosing the Right Nonprofit Investment Advisor

Registered Investment Advisors (RIAs) operate under fiduciary standards requiring them to act in their clients’ best interests, making them preferable to broker-dealers who operate under less stringent suitability standards.

Think of the difference like this: a fiduciary is required to provide the best possible advice, under all circumstances. An advisor working under a suitability standard only has to provide advice that is, essentially, reasonable.

The difference often comes into play when an advisor, under the suitability standard, chooses to recommend the more investment option that pays them more, even though there is a similar, cheaper option.

RIAs managing nonprofit accounts must understand the unique compliance requirements, mission considerations, and tax implications affecting charitable organizations.

Essential questions for potential advisors include:

• What is their experience with nonprofit clients?
• Do they understand tax exempt status implications?
• Do they offer mission-aligned investing options, such as ESG or SRI?
• Ask about their investment philosophy, asset allocation approaches, and how they handle market volatility.
• Do they provide help with services beyond just investments, such as governance, board education, or facilitating stock donations?
• Will they support your organization through sponsorships or donations?
• Are they a fiduciary and if so, are they willing to sign a fiduciary pledge?
• How do their fees work? How do their fees for nonprofits differ from the fees they charge their individual clients?

Request references from similar nonprofit organizations

Typical fee ranges for nonprofit investment management run from 0.15% to 1.5% annually, depending on account size and service level. Sadly, the average fee for nonprofits is over 1%, but there are options which provide nonprofit-specific investment services for significantly below average fees. (NACUBO provides an annual study that pegged average fees, including investment expenses, at 1.29% per year).

My experience shows that Fee-only compensation models align advisor interests with client success, while commission-based models may create larger conflicts of interest. Another item I should mention is that many advisors offer tiered fee structures, with lower percentages for larger account balances.

Minimum investment requirements vary significantly by advisor, ranging from $10,000 for basic services to $1 million for specialized institutional programs. Many advisors offer pooled investment options that allow smaller nonprofits to access institutional-quality investment management with lower minimums. Online platforms increasingly provide nonprofit-focused investment management with minimums as low as $5,000. At Plentiful Wealth, our investment services have a $100,000 minimum. We would love to work with nonprofits that are just starting to invest, but our custodian doesn’t allow accounts under that size for nonprofit organizations. That said, we’re always happy to chat and point you in the right direction.

Red flags to avoid include advisors who don’t understand nonprofit regulations, guarantee specific returns, push proprietary products with high fees, or lack proper licensing and registration. Be wary of advisors who can’t provide clear explanations of their investment process or who pressure organizations to make quick decisions without proper due diligence.

If you want to check out an advisor’s licensing and background, the best resource is to visit BrokerCheck. This site is administered by FINRA and includes all licensed advisors, whether they work for a registered investment advisor or for a broker-dealer. If someone says they’re licensed but you can’t find them here, caveat emptor.

Working with a nonprofit investment advisor who focuses specifically on providing nonprofit specific services is likely your best option. Going this route provides access to expertise in regulatory compliance, mission-aligned investing, and strategies specifically designed for charitable organizations. These specialists understand the unique challenges nonprofits face and can provide guidance on issues like spending policies, donor restrictions, and board governance.

Strategic Research for Nonprofit Investing

Look, I’m going to be straight with you about something that’s absolutely critical for nonprofits: strategic research is what separates the organizations that thrive from those that struggle financially. You can’t just throw money at investments and hope for the best. I’ve seen too many nonprofits make this mistake. When you dig deep into evidence-based investing research, you’re not just looking for decent returns, you’re building a comprehensive portfolio that actually make sense for your organization. And here’s the thing: a good nonprofit investment advisor isn’t just nice to have, it’s essential. They understand the ins and outs of investment strategies and risk assessment specifically for organizations like yours.

Step-by-Step Implementation Guide

Phase 1: Preparation and Planning

Start with with determining how much money your organization can afford to invest without compromising operational stability. I recommend maintaining 6-18 months of operating expenses in readily accessible reserves before investing additional funds. For most organizations, I lean towards 6 months of expenses, as keeping 18 months can be a significant hurdle to overcome. Overall, organizations should analyze cash flow patterns, upcoming major expenses, and seasonal funding variations to determine appropriate investment amounts.

Board education and buy-in processes require presenting investment concepts to trustees who may lack financial expertise. Schedule educational sessions covering basic investment principles, nonprofit-specific regulations, and potential risks and benefits. Address concerns about market volatility and emphasize the long-term nature of successful investing strategies. Document board discussions and decisions to demonstrate proper governance.

A review of organizational bylaws and governing documents will be necessary to ensure that investment activities comply with founding documents and any donor restrictions. Some organizations have bylaws limiting investment activities or requiring specific approval processes. Review any donor agreements that might restrict how contributed funds can be invested, particularly for endowed or restricted gifts.

Implementation timelines typically range from 3-6 months from initial board discussion to funded investment accounts. This includes time for education, policy development, advisor selection, and account setup. Organizations should plan for this timeline when making investment decisions and avoid rushing the process due to market timing concerns.

Phase 2: Account Setup and Initial Investment

Finding the required documentation for opening investment accounts is usually a simple process. Depending on where you open an account, required documentation will usually include certification from the state showing that your organization is legally in good standing, your IRS determination letter, and a completed application. The application will typically require an authorized signed, as well as the designation of one, or multiple, individuals who will be the organization’s official points of contact. As a best practice, I recommend having both a staff member and a board member listed as an authorized user; this helps provide continuity during board transitions. Likewise, it provides the board with a level of oversight as well.

On the organization’s side, there are some steps you will likely need to take as well. This generally includes a board resolutions that authorizes investment activities, depending on your organizational bylaws. Oh, and investment advisors will also require taxpayer identification numbers and information about authorized signatories for the investment account.

Account opening processes with major custodians like Schwab, Fidelity, and Vanguard have specialized nonprofit services teams familiar with tax exempt organization requirements. These firms offer institutional-quality services with competitive fees and comprehensive reporting capabilities. Compare account minimums, fee structures, and available investment options when selecting custodians.

Initial asset allocation should follow guidelines established in the organization’s Investment Policy Statement, typically starting with conservative allocations that can be adjusted over time as the board becomes more comfortable with market fluctuations. Many organizations begin with 60% bonds and 40% stocks, gradually increasing equity allocations as experience and confidence develop.

Setting up automatic rebalancing and reporting systems ensures the investment portfolio maintains target allocations and provides regular performance updates to organizational leadership. Most custodians offer automatic rebalancing services that buy and sell investments to maintain target percentages, reducing administrative burden while maintaining investment discipline.

Phase 3: Ongoing Management and Monitoring

Quarterly performance reviews provide regular assessment of investment portfolio performance against established benchmarks and organizational goals. These reviews should compare returns to relevant market indices, evaluate progress toward investment objectives, and assess whether current allocations remain appropriate for organizational needs. The tempo of your reviews should be documented in your IPS. What I see most often is that the finance or investment committee will review investment accounts on a quarterly basis, while the full board will review accounts on an annual basis. This provides the full board with more time to focus on impact.

Board reporting procedures should include standardized reports showing account balances, performance versus benchmarks, asset allocation percentages, and any recommended changes to investment strategy. Reports should be understandable to board members without extensive financial backgrounds while providing sufficient detail for informed decision-making.

Annual Investment Policy Statement reviews ensure continued alignment between investment strategy and organizational needs. Changes in organizational goals, financial stability, or market conditions may require updates to investment objectives, risk tolerance, or asset allocation targets. Document any changes through formal board action.

Integration with annual budgeting and cash flow planning coordinates investment activities with operational needs. Organizations should plan investment contributions and withdrawals around budget cycles, major grant awards, and seasonal funding patterns to optimize both investment returns and operational cash flow.

Managing Investment Risk and Volatility

Asset allocation strategies form the foundation of risk management for nonprofit investment portfolios. Diversifying across multiple asset classes reduces the impact of poor performance in any single investment category. Conservative organizations might allocate 70% to bonds and 30% to stocks, while those with longer time horizons could use 60% stocks and 40% bonds.

Dollar-cost averaging through regular contributions to investment accounts helps smooth out market volatility and reduces the impact of market timing on investment returns. Organizations can set up automatic monthly or quarterly transfers from operating accounts to investment accounts, building portfolio value consistently regardless of market conditions.

Rebalancing strategies maintain target asset allocations by periodically buying and selling investments to restore desired percentages. Organizations can rebalance quarterly on set dates or when allocations drift more than 5-10% from targets. Regular rebalancing forces the discipline of selling high-performing investments and buying underperforming categories.

Stress testing portfolios against various market scenarios helps organizations understand potential risks and prepare for adverse conditions. Consider how the investment portfolio would perform during scenarios like the 2008 financial crisis, COVID-19 market disruption, or extended periods of high inflation. It is crucial to prioritize actions and implement a crisis playbook for endowments and foundations, especially those facing market and policy-driven crises.

Building liquidity buffers separate from investment accounts ensures organizations can meet unexpected expenses without selling investments at inopportune times. Maintain 3-6 months of operating expenses in liquid savings accounts or money market funds separate from longer-term investment portfolios.

Private Markets: Opportunities and Considerations for Nonprofits

Let me be frank about private markets for nonprofits…they’re a compelling opportunity, but they’re not for everyone. I’m talking about private equity, hedge funds, and real assets like real estate and infrastructure. These investments can deliver higher potential returns and better diversification than what you’ll typically see in public markets, which frankly can strengthen your nonprofit’s overall portfolio. But here’s the thing—private market investments come with their own unique challenges. We’re looking at higher risk, lower liquidity, and longer investment horizons compared to your traditional public market assets. It’s not a decision to take lightly.

Before you allocate a single dollar to private markets, you need to take a hard look at your investment objectives and risk tolerance. I can’t stress this enough—a well-defined nonprofit investment policy statement is absolutely essential for guiding these decisions. This isn’t just paperwork…this document ensures that any private market investments align with your organization’s mission, values, and long-term goals. Your investment policy statement should spell out specific criteria for evaluating private market opportunities. I’m talking about due diligence processes, expected returns, and acceptable risk levels. Without this roadmap, you’re essentially flying blind.

Here’s my biggest takeaway when it comes to navigating private markets: you need experienced asset managers and investment advisors on your team. These professionals bring specialized knowledge that most nonprofits simply don’t have in-house. They can help assess whether various investments are suitable for your organization and assist in managing the complexities that come with private assets. By taking a disciplined approach and sticking to a robust investment policy, nonprofits can responsibly pursue the benefits of private market investing—portfolio diversification and potential for higher returns—while protecting their assets and upholding their fiduciary responsibilities. It’s about being smart, not just opportunistic.

Nonprofit Investing Reporting Requirements

Form 990 reporting requires nonprofits to disclose investment income and gains on their annual tax returns. Investment income is typically reported as “investment income” while capital gains from investment sales are reported separately. Organizations must maintain detailed records of investment transactions to support accurate reporting.

Unrelated Business Income Tax (UBIT) considerations primarily affect active business investments rather than passive securities investments. Income from stocks, bonds, and mutual funds typically qualifies for exemption from UBIT, but organizations should consult tax professionals about specific investments that might generate taxable income.

State reporting requirements vary by jurisdiction but may include reporting investment income on state tax returns or annual charity registration forms. Some states have specific requirements for investment activities by charitable organizations, particularly regarding conflicts of interest and board oversight.

Coordination with annual audit procedures ensures investment activities are properly documented and reviewed by independent auditors. Provide auditors with investment statements, transaction records, and board documentation regarding investment decisions and oversight activities.

Record-keeping requirements include maintaining investment statements, transaction confirmations, performance reports, and board meeting minutes discussing investment decisions. These records demonstrate proper oversight and compliance with applicable regulations while supporting accurate financial reporting.

Liability and Leadership in Nonprofit Investing

I want to talk about something that’s at the heart of effective nonprofit investing: leadership and accountability. If you’re a volunteer board member or nonprofit leader, you’re carrying some serious fiduciary responsibilities. You’re overseeing investment decisions that directly impact your organization’s financial stability and long-term success. To handle these duties properly and keep yourself protected from potential liability, you need clear investment strategies and consistent oversight through a solid investment policy statement.

Here’s my take on investment policy statements: a well-crafted one doesn’t just guide your investment decisions—it’s your protective framework. It outlines your organization’s approach to risk management, asset allocation, and mission alignment. When you stick to these guidelines, you’re showing prudent stewardship of your nonprofit’s assets and reducing your exposure to personal liability. It’s that simple.

I also recommend establishing an investment committee or working group. This enhances your oversight and ensures that investment decisions get made collaboratively, in line with your organization’s mission and values. Regular reviews and transparent reporting help you maintain accountability and support informed decision-making. My biggest takeaway here is that collective oversight beats going it alone.

Frankly, partnering with wealth advisors or investment advisors who specialize in nonprofit organizations can provide the additional expertise you need. These professionals help you navigate complex investment strategies and regulatory requirements. By prioritizing prudent investment practices, seeking professional guidance, and maintaining consistent oversight, you can protect your organization’s financial health and ensure that your investments continue to benefit the communities you serve.

Common Mistakes to Avoid

Investing without a written Investment Policy Statement or proper board approval creates legal and fiduciary risks for nonprofit organizations. Board members have fiduciary responsibilities requiring documented decision-making processes and clear guidelines for investment activities. Always obtain formal board approval before opening investment accounts or making significant investment decisions.

Choosing investments that conflict with organizational mission can damage relationships with donors, volunteers, and the community. Environmental organizations investing in fossil fuel companies or healthcare nonprofits investing in tobacco companies face potential backlash and reputation damage. Establish clear screening criteria aligned with organizational values.

Inadequate diversification or concentration risk occurs when organizations invest too heavily in single investments, asset classes, or geographic regions. Concentration risk increases the potential for significant losses and violates prudent investment principles. Maintain broad diversification across asset classes, industries, and geographic regions.

Failing to coordinate investment strategy with cash flow needs can force organizations to sell investments at inappropriate times to meet operational expenses. Maintain adequate liquid reserves separate from investment accounts and plan investment withdrawals around predictable cash flow needs.

Neglecting to review and update investment policies regularly can result in strategies that no longer serve organizational needs. Market conditions, organizational growth, and changing goals require periodic policy updates. Schedule annual reviews of investment policies and performance to ensure continued alignment with organizational objectives.

Frequently Asked Questions

How much should a nonprofit invest initially?

Most experts recommend starting with 3-6 months of operating expenses after maintaining adequate cash reserves for immediate needs. Organizations typically begin with $25,000-$100,000 minimum investments depending on the advisor. The key is ensuring sufficient liquidity for operations while putting excess reserves to work generating returns that combat inflation.

Can nonprofits lose their tax-exempt status by investing?

No, passive investment activities like buying stocks, bonds, or mutual funds do not jeopardize 501(c)(3) status as long as investments don’t provide private benefit to insiders and comply with IRS regulations on prohibited transactions. Investment income from securities is specifically permitted and encouraged for building organizational sustainability.

What happens if nonprofit investments lose money during market downturns?

Investment losses are part of normal market fluctuations and don’t affect tax exempt status. Nonprofits should maintain adequate cash reserves separate from investments and follow their Investment Policy Statement guidelines for risk management during volatile periods. Historical data shows diversified portfolios recover from downturns over time, making patience and long-term perspective essential.

How often should nonprofit investment performance be reviewed?

Most organizations review investment performance quarterly with their advisor and provide annual reports to the board. The Investment Policy Statement should be formally reviewed annually or when significant organizational changes occur. Regular monitoring ensures the investment strategy continues serving organizational goals while maintaining appropriate risk levels.

Are there any investments nonprofits should completely avoid?

Nonprofits should avoid investments that create conflicts of interest (like investing in board members’ companies), highly speculative investments inconsistent with their risk tolerance, and any investments that contradict their stated mission or values. Additionally, investments that generate Unrelated Business Income Tax liability or violate donor restrictions should be avoided unless specifically approved through proper governance procedures.