How charities and NPOs in Hong Kong can better manage their reserves

Finance managers and committee members of charities, non-governmental organisations (NGOs) and not-for-profit organisations (NPOs) have a fiduciary duty to manage their organisation’s reserves in the best interests of its beneficiaries. 

Yet in practice, reserves management is often reactive — cash sits idle in low-yielding accounts and may be eroded by inflation while teams focus on operations and fundraising.

Effective reserves management requires role clarity, a structured investment framework, and can be greatly facilitated by a specialist external partner. This article sets out how charities in Hong Kong can approach each of these.

The role of treasurers and finance directors in charity reserves management

Beyond financial operations and reporting, treasurers and finance directors of charities, NGOs and NPOs in Hong Kong carry specific statutory and governance obligations. 

These encompass full compliance with local laws, including but not limited to:

• The Inland Revenue Ordinance (Cap. 112) — in particular, maintaining the conditions for tax-exempt status under Section 88, provided that the funds are used solely for charitable purposes and not expended substantially outside Hong Kong. 
• If a charity is incorporated as a company limited by guarantee, it falls under the purview of the Companies Ordinance (Cap. 622).
• Maintaining accurate records of donations and expenditure, as well as additional tax-related duties and obligations

In addition, if a charity is structured as a charitable trust and its governing document or trust deed does not specify investment powers, the default statutory investment powers of the Trustee Ordinance (Cap. 29) will apply. 

This list of requirements is not exhaustive, and it is important to get appropriate legal and tax advice and help in order to ensure full compliance with all applicable rules and regulations. 

Key priorities in managing charity reserves

Unlike for-profit organisations, charities must also weigh a set of competing financial priorities that can pull in different directions simultaneously.

Maintaining adequate liquid emergency funds

Economic disruptions — such as the global pandemic in 2020–2022 — demonstrated that charities with adequate liquid reserves were far better positioned to sustain their beneficiaries when donation income fell sharply while operational costs did not. 

Even Hong Kong's largest umbrella non-profit, The Community Chest, has felt the impact of a broader downward trend in charitable donations in recent years. 

A commonly cited benchmark is to hold at least 3 to 6 months of operating expenditures as operating reserves in accessible, low-risk liquid instruments — a level recommended by bodies including the Hong Kong Council of Social Service (HKCSS). For Hong Kong charities, this typically means instruments settled in HKD to avoid currency risk on short-term obligations.

Inflation hedging

Inflation remains a persistent concern for NGOs and NPOs, which typically cannot pass cost increases on to beneficiaries. While headline CPI numbers in Hong Kong may appear moderate, charities continue to face rising operational cost pressures in areas such as rent and staffing. 

Reserves held entirely in cash or fixed deposits may lose real purchasing power over time. Proactively investing a portion of reserves in instruments that have historically kept pace with or exceeded inflation — such as money market funds or short-duration bond funds — may help preserve the real value of the charity’s funds over the medium term.

Growing reserves for long-term sustainability

Many NGOs and NPOs aspire to greater self-sufficiency, with less reliance on cyclical donation income. This may involve allocating a portion of reserves — above a defined minimum liquid buffer — into higher-returning asset classes, better if professionally managed within a clearly defined risk framework. Some organisations cap their total reserves at a fixed multiple of annual operational expenditure; others maintain separate restricted and unrestricted fund pools with distinct investment mandates.

For charities that receive government subventions from the Social Welfare Department (SWD), the Lump Sum Grant Manual applies a reserve cap — typically up to 25% of annual operating expenditure — and generally restricts subvented funds to low-risk HKD-denominated bank deposits. Finance managers should ensure the investment policy clearly distinguishes between subvented and non-subvented reserves.

Financial accountability and governance

Charities are stewards of donated funds. Finance managers have a responsibility to maintain sound, auditable investment practices that are consistent with donors' intentions and the organisation's stated purposes. This means prudent budget management, clear documentation of investment rationale, and transparent reporting to boards and committees.

Under IRD's Departmental Interpretation and Practice Notes (DIPN 37), reserves must be applied solely for charitable purposes. While building an emergency reserve or investing for long-term capital preservation is permissible, reserves managed in a manner that resembles active trading or speculation may attract scrutiny and could put a charity's Section 88 tax-exempt status at risk.

Why every charity needs an Investment Policy Statement

An Investment Policy Statement (IPS) is a formal document that defines how a charity’s reserves will be invested. It aligns all stakeholders — the executive committee, board of directors, finance and investment committee, and any external investment managers — around a shared framework. It also provides a clear basis for evaluating external managers and assessing performance over time.

A well-constructed IPS typically covers:

• Roles and responsibilities: The duties of the Investment Committee and the Executive Committee or Board of Directors, including escalation procedures for significant drawdowns. 
• Investment objectives, risk tolerance, and time horizon: Return expectations, acceptable volatility levels, maximum drawdown limits, and holding periods for different reserve pools. 
• Asset allocation and investment limits: Allowed asset classes, allocation ranges, and any instruments that are explicitly excluded. 
• Reporting and monitoring: The frequency of reporting from the Investment Committee to the Board, and the threshold at which a drawdown triggers a formal review. 
• Socially responsible and ethical investment (optional): Any environmental, social, and governance (ESG) approach, sector exclusions, or adherence to specific frameworks such as the Sustainable Finance Disclosure Regulation (SFDR).

How to implement your investment policy: a goal-based approach

Different investment goals come with different time horizons and risk appetites. A practical way to manage this complexity is to divide reserves into distinct pools — sometimes called a "bucket" approach — each with its own objective, investment horizon, and permitted instruments.

For short-term liquidity, the focus is on capital preservation and accessibility. Instruments such as time deposits, Exchange Fund Bills and Notes, and HKD money market funds are well-suited here. For medium- to longer-term reserves that the charity does not need for day-to-day or near-term expenses, higher-yielding instruments such as short-duration bond funds or a diversified fixed income allocation may be appropriate.

The overall reserves portfolio is the sum of these individual pools — each governed by its own mandate within the broader IPS framework.

Investment options for charity reserves: balancing yield, flexibility, and risk

Finance managers evaluating where to hold reserves should look beyond bank savings accounts and time deposits as the default option. Several low-to-moderate-risk alternatives may offer better risk-adjusted outcomes for Hong Kong charities:

• Time deposits (fixed deposits): Predictable returns, low risk, but limited flexibility and significant break penalties if funds are needed before maturity.‍
• Money market funds (HKD and USD): Invest across diversified low-risk instruments including bank deposits, Exchange Fund Bills, and short-term government securities. Typically offer daily liquidity with T+3 settlement and competitive yields. Particularly well-suited for the emergency reserve portion of a charity’s reserves, as they provide yield without locking up funds.‍
• Short-duration bond funds: May offer higher yields than money market funds over a medium-term horizon, with modestly higher volatility. Appropriate for reserves not required within 12–24 months.

The right allocation depends on each charity’s specific liquidity needs, investment horizon, risk tolerance, and currency requirements — which is precisely why a tailored IPS is so important.

Why outsourcing investment management makes sense for most charities

Managing a charity’s reserves requires investment expertise that most internal finance teams do not have — nor are they expected to. The time demands of financial operations, compliance reporting, and stakeholder management leave little bandwidth for active portfolio oversight. For most charities, outsourcing reserves management to a specialist external advisor is both more efficient and likely to produce better outcomes.

When evaluating an investment advisory partner, charities should consider:

Relevant experience with charitable organisations

The advisor should have demonstrable experience managing reserves for charities or NPOs, with an understanding of the governance constraints, liquidity requirements, and reporting obligations involved. Ideally, a dedicated client advisor and investment advisor would work together to translate the charity’s goals into a coherent, IPS-aligned investment strategy.

Asset safety and custodial arrangement

Under Hong Kong regulations, licensed investment advisors are required by law to segregate client monies and assets from their own. This protects against misuse or misappropriation and makes it straightforward to verify holdings directly with the custodial bank.

Transparent, conflict-free fee structure

Many fund products distributed in Hong Kong carry embedded trailer fees — retrocessions paid by fund managers to distributors, which create an incentive to recommend higher-cost products. Charities should seek advisors operating on a fee-only basis, where the advisor is paid solely by the client and has no financial incentive to favour particular products. Advisors who rebate 100% of trailer commissions back to the client provide a material cost advantage over time.

Investment implications for charity finance managers

Effective reserves management is not just a governance obligation — it is a meaningful lever for long-term organisational sustainability. A Hong Kong charity that preserves the real value of its reserves through a well-constructed investment framework is better positioned to serve its beneficiaries through economic cycles, funding shocks, and periods of elevated inflation.

The practical steps are clear: establish role clarity among finance and committee members, put an Investment Policy Statement in place, and partner with an advisor who understands the specific constraints and obligations of the charitable sector in Hong Kong.

How Endowus supports charities with reserves management

Endowus Treasury Solutions provides institutional-grade investment advisory services for charities and NPOs in Hong Kong. Endowus HK Limited is licensed and regulated by the Securities and Futures Commission of Hong Kong (SFC, CE No. BQR225) under the Securities and Futures Ordinance (Cap. 571) for Type 1 (Dealing in Securities), Type 4 (Advising on Securities), and Type 9 (Asset Management) regulated activities.

Our platform offers dedicated relationship managers, a fee-only advisory model with 100% trailer fee rebates, and access to a curated range of money market and fixed income solutions in HKD and USD, suited to the liquidity and risk requirements of charitable reserves. Uninvested cash is held in a segregated client account at HSBC, separate from Endowus' own balance sheet.

To find out more about how Endowus can support your charity’s reserves management, contact us at institutional.hk@endowus.com or schedule a complimentary consultation with our SFC-licensed advisors.

FAQs

What is an Investment Policy Statement for a charity in Hong Kong? 

An Investment Policy Statement is a formal governance document that defines how a charity's reserves will be invested. It sets out investment objectives, risk tolerance, permitted asset classes, roles, and reporting requirements — aligning the board, finance committee, and any external managers around a shared framework.

How much should a Hong Kong charity hold in reserves? 

The Hong Kong Council of Social Service recommends holding at least three to six months of operating expenditure as liquid reserves. Charities receiving Social Welfare Department subventions face an additional cap of up to 25% of annual operating expenditure on Lump Sum Grant reserves.

Can investing reserves put a charity's Section 88 tax-exempt status at risk? 

Yes. Under IRD's DIPN 37, reserves must be applied solely for charitable purposes. Investment activity that resembles active trading or speculation may attract scrutiny from the Inland Revenue Department and could jeopardise a charity's Section 88 tax-exempt status. It is recommended to get appropriate legal advice and help in order to ensure full compliance with all applicable rules and regulations. 

What investment instruments are suitable for Hong Kong charity reserves? 

HKD money market funds, Exchange Fund Bills and Notes, time deposits, and short-duration bond funds are commonly used. The right mix depends on each charity's liquidity needs, time horizon, risk tolerance, and whether reserves are subvented or unrestricted.

Why do embedded trailer fees matter when choosing an investment advisor for a charity? 

Trailer fees are typically paid by fund managers to distributors, which creates an incentive to recommend potentially higher-cost products. Charities working with a fee-only advisor — one paid solely by the client with no trailer fee income —  can avoid this conflict and may achieve lower all-in costs over time.

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