An investment reserve is a term used to identify any assets that an investor or a company have held in check to cover losses incurred when certain investments contained in the portfolio experience some sort of downturn in value. The idea behind an investment reserve is to create a type of financial cushion that allows the investor to remain financially solvent even if several investments begin to fail. This approach is particularly important if the goal for the investments was to use the dividends or interest earned to retire debts or honor some other type of financial obligation, since the investment reserve can be used to make up any shortfall that could occur and create difficulty in honoring those obligations.
One of the more common examples of an investor making use of an investment reserve is an insurance company. Companies of this type typically own a number of investments that earn returns that are used to settle claims submitted by policyholders. In order to make sure there are funds available to cover those claims in the event that some of those investment fail to perform as anticipated, an insurance company will set aside a reserve that is capable of making up the difference. The amount of the investment reserve is normally a minimum percentage of the anticipated returns from all investments currently held by the investor.
Individual investors may also establish some type of investment reserve. The actual form used will vary, with some investors choosing to deposit a certain amount of money in an account that provides some small amount of interest but offers little to no penalties when it comes to withdrawing funds from the account. The reserve may also be in the form of liquid assets, meaning they can be sold quickly and at an equitable price if the need should arise. Determining the most efficient manner to set up and maintain an investment reserve will vary, depending on the circumstances of the investors.
The main benefit of creating an investment reserve is reducing the overall risk to the investor of not being able to honor his or her financial obligations. By having the reserve in place, the investor has the resources on hand to service debt, even if stock dividends or interest payments on bonds turns out to be less than anticipated. Since the assets in the reserve can be used to make sure all debt is paid on time, it can be seen as a tool to help protect the credit rating of the investor, something that may be very important to being able to participate in future financial opportunities.
