A reserve that is created and maintained as a cushion against any possible reversal of interest rate trajectory on unexpected market developments. For an investment company, for example, the net profits and losses arising from the purchase and sale of securities are respectively credited and debited to a reserve account (the investment fluctuation reserve). The investment fluctuation reserve, though part of equity, is not available for the payment of dividends, but rather the payment for making up any reversal effects on yield and similar types of income, and also for payment of income tax on profits made on the sale of securities.

To be as much prudent as needed, companies need to take maximum amount of gains realized on sale of securities to the investment fluctuation reserve (IFR). At their discretion, companies and banks can build IFR up to a certain percentage (10%) per cent of the investment portfolio. This reserve is set aside out of profit to adjust the difference between book value and market value (fair value) of investments.

Investment fluctuation reserve is designed to absorb fluctuations in the value of investments held by a company, as long as these investments remain active. At the time of rewinding, the investment fluctuation reserve will be transferred to the realization account, in which the values of assets and liabilities are parked and distributed.

As a reserve account, investment fluctuation reserve has a credit balance. Upon realization, its balance will be credited to the realization account. The effect is to reduce the total assets of the investment and increase the equity available for distribution to all parties involved.

For example, banks can absorb losses arising from higher yields (e.g., bond yields). Banks do their best to prepare for hardening yields with tools such as IFR, whereby it can set up adequate buffers to withstand trading loss. It enables banks to maintain an adequate reserve to safeguard against increase in yields on their balance sheet in the future.