Investing Your Reserve Funds
| By: Josephine O. LaleyeManaging and investing an association’s reserve funds can be daunting, but it is very important to the association’s fiscal health. The board of directors has a fiduciary duty to ensure that the association’s funds are invested responsibly1. It is prudent to have the funds held in banks that are FDIC-insured or have similar insurance to cover all funds. It is important that the board establish and closely monitor the association’s investment policy.How does a board decide the investment strategy to adopt for the association that will protect principal and yield good returns while maintaining FDIC insurance and adequate liquidity? Many factors should be considered, such as: the community’s age, geographic location, by-laws and reserve study1. Yes, the reserve study! A reserve study is a powerful budget-planning tool that enables the board to determine funding strategy in order to ensure that sufficient funds are set aside for future repairs and replacements of components of common property. Reserve studies are required in many states, including Virginia.Laddering FDIC-insured CDs is a popular investment strategy for non-liquid funds. These income-producing CDs should be no more than $250,000 in a single financial institution unless additional private deposit insurance is provided by the financial institution. Laddering allows the CDs to mature at varying times so that funds become available periodically without having to prematurely close the CDs and incur early termination penalties. However, short-term (3-12month) CDs often provide small rates of return1. If interest rates are low, the board may want to invest for shorter terms. If interest rates are high, the board may want to invest for longer terms to take advantage of the higher yield.Another option is FDIC-insured interest-bearing savings and money market accounts. Some money market accounts seem to have higher rates of return and provide more liquid investment vehicles.The association’s investment policy should help to maintain a strong balance between liquidity, safety of the members’ money and proper yield to meet the association’s financial needs. The board should regularly review the association’s investment strategy and make adjustments as needed._______________________________________________________________________________________________________________1 Quorum Magazine, January 2015 |