Objectives and Constraints of Institutional Investors

Tha various Objectives and Constraints of Institutional Investors. Who are institutional investors? It is worth mentioning that the institutional investors include mutual funds, pension funds, endowment funds, insurance companies and banks.

  1. Mutual Funds

The role of mutual funds is to pool together funds of investors who share a common investment goal or interest and invests them in financial assets as per its investment objective.

2. Pension Funds

Pension funds receive contributions from the firm, its employees, or both and invests those funds for the respective contributing parties.

  • Defined Benefit – promise to pay retirees a specific income stream after retirement. Risk resides with the employer
  • Defined Contribution – Employees contribute to a pension scheme while employed. No guarantee from the employer regarding the size of retirement income stream. Risk resides with the employee.

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3. Endowment Funds: 

Endowment funds represent contributions made to charitable or educational institutions. it is an investment fund set up by a foundation which periodically makes withdrawals from the invested capital.

4. Insurance Companies

An insurance company is that which pools together clients’ risks to make payments more affordable for the insured in the event of losses due to the insured peril. the types of insurance cover include:

  • Life Insurance Companies

–Earn rate in excess of actuarial rate

–Growing surplus if the spread is positive

–Fiduciary principles limit the risk tolerance

–Liquidity needs have increased

  • Nonlife Insurance Companies

–Cash flows less predictable

–Fiduciary responsibility to claimants

–Risk exposure low to moderate

–Liquidity concerns due to uncertain claim patterns

–Regulation more permissive

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A bank can be defined as a financial institution licensed to accept customer deposits and advance loans too. Banks can also offer financial services which include wealth management, safe deposit boxes and  currency exchange. They;

  • Must attract funds in a competitive interest rate environment
  • Try to maintain a positive spread between their cost of funds and their return on assets
  • Need substantial liquidity to meet withdrawals and loan demands
  • Face regulatory constraints
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