One of the most frequent questions we encounter from charities, particularly during discussions between audit committees and management, is: What is the right amount of reserves a charity should have? While there is no definitive answer, maintaining an appropriate reserve level requires a delicate balance. Charities need sufficient reserves to ensure that there is no going concern issues and they can finance their activities for the next few years, while also demonstrating that they are not holding on to excess reserves and are duly supporting their cause or mission to the beneficiaries, as holding too much may discourage future funding.


In recent years, particularly since the onset of Covid-19, the charity sector has faced increasing uncertainties. The inflationary environment and rising interest rates have put pressure on household budgets and on donations from the public. While the economic environment may lead to more demand for the charities’ services, there is also a decrease in donations from public as donors are being more discerning about the causes they are willing to contribute to, either in terms of money or volunteer work. It is apparent that they tend to extend their time and money to organisations that are transparent about their strategies and investments. 


Furthermore, donor fatigue is becoming more prevalent. With multiple organisations often pursuing similar causes, donors face dilemmas over which charity to support. They also face challenges in securing adequate government funding for their causes. In addition, if donors are aware of government funding supporting the charity, it may affect their own philanthropic and charitable giving.


Another growing challenge is fundraising fatigue, which affects the effectiveness of continued fund-raising efforts by organisations as they may struggle to keep approaching the same donors again.


All the above reasons highlights the importance of charities having alternative income streams, especially through investments that they can control with a sound investment policy clearly stating their objectives, risk tolerance, and time horizon. In addition, timely monitoring of the investment performance and returns is key for a sound investment strategy. It is also important that the board is equipped with the right individuals who can review the performance results and make appropriate decisions. 


Depending on the risk appetite of the organisation, there are lower-risk investments such as money market funds, Treasury bills, etc., that a charity in the early stages of its investment strategy can consider. In addition, with the increasing importance of ESG, we hear about impact investing or socially responsible investing, where the investments are made in companies that share the same values as the charity. In countries that embarked on the ESG journey earlier than Singapore, we see emerging funds such as gender-focused funds (companies that have significantly more female leaderships), ESG funds, green funds and social impact funds (e.g., those investing in renewable energy) becoming popular, with investment managers tailoring portfolios for charities. 
 

Key Takeaways

Some key takeaways for charities looking to enhance their investment strategies include:

  1. Understanding Your Financial Landscape: Assess your current reserves and future funding needs to decide your investment approach.
  2.  Diversify Investments: Explore a mix of asset classes to balance risk and return, ensuring your reserves can support your mission over the long term.
  3. Collaborate with Experts: Partnering with investment professionals can provide tailored strategies that align with your charity’s goals and values. Having a management representative with basic knowledge to understand external advice is key to ensuring the investment strategy is reasonable and supports the charity’s plans.
  4. Regularly Review Your Strategy: Monitor your investment performance and adjust as necessary to stay aligned with your objectives.
     

By focusing on these areas, charities can better manage their reserves and ensure financial stability for the future. 


This article is adapted from a presentation by Uthaya Ponnusamy and Sovann Giang at an external event on investments for charities.
 

To find out more about RSM’s Not-for-Profit Practice and how we can help you, speak to our specialists:

Uthaya C Ponnusamy
Partner
Sovann Giang
Senior Director