Objective and constraints of institutional investor Institutional investor
Institutional investor is the combination of people, organization, and group with significant money to invest in different investment opportunities available in market. It can be an individual or groups to invest in mutual funds, insurance, bounds etc. A concise review of all these is given below.
Mutual funds are the collection of the money from different investors and putting it in one basket to buy an financial asset. It's not more than a bound or stock. Every mutual funds have their own objective of investment. They define its objective to investor and investor decides whereas to invest according to their own analysis or expectation or demand of return rate. There are two types of problems with fund those are the manager's options that they provide in funds and other one is the limitations by law to protect the investor to gain trust and developing the behavior towards funds.
Pension funds are the lump sum amount that a company pays to its employees at the time of retirement to save the old age session. This amount can be a contribution of employ, employer or both. Purpose is to provide the amount to employee at the retirement time. Contribution size is depending on the salary of employee and return of the asset. Defined benefit pension plans are the commitment to pay a specific amount at the time of retirement will be paid to person. Company bear risk in this condition is the company will able to pay a specific amount at that time .defined contribution plan is the announcement of contribution in the fund by company. This is based on the assumption that the company can contribute how much according to return and change in salary and economic condition. This can be under funded plan and over funded plan describes the value of asset increase or decrease. Liquidity of funds is depend on the age of the employees is they are young there is less liquidity if he is old then liquidity is high. There is no effect of tax on fund because funds contribution amount is deduct from tax able income.
Charity amount or the amount funded by the educational institutions is called endowment. Instead of spending all funds at one time
organizations invest it for future benefits. Policy of endowment depends on the goal of future income maximization against inflation. Liquidity is minor in the endowment.
Insurance companies are another option but the limitation is are they are life insurance companies or not. Life insurance companies take money from an individual in his whole life and return money at the time of his death to his child's or relatives. Nonlife insurance companies take a money from person for any asset, lawsuit, accident, disaster. In any condition they pay back the maturity amount after specific time period. Insurance companies liquidity have to increase with the passage of time and also pays tax of capital gain and income same like a corporate tax.
Bank is also another financial institution who take money from peoples who have surplus income and lend those money to income deficit people . bank always take its rate of return more than cost. With the analysis of interest rate fluctuation in short and long term thry invest in different assets. Working capital or cash is substantial need of banks to manage the rotten deposits and windrows. Due to high liquidity and interest benefits short time horizon in bank.