INSTITUTIONAL INVESTOR

INSTITUTIONAL INVESTOR

An institutional investor is a financial institution or an entity like a bank, broker-dealer, or insurance company that can invest large amounts of funds for their own portfolio or for portfolios they manage. In contrast, a retail investor is usually a typical individual investor who invests particularly and only for his own portfolio. Let us explore in this article about what institutional investors actually mean and how they are different and their working. 

WHAT IS AN INSTITUTIONAL INVESTOR?

An institutional investor is an entity like an insurance company or bank that invests large amounts of funds towards its own financial objective or for the portfolio it manages, The characteristics, features and forms of institutional investors can widely vary. They are regulated differently and invest in various assets toward their specific investment objective. The legal definition can also differ a bit. For example, someone may define it as an entity which invests more than a set amount in securities that are not related to itself.

What institutional investors have in common is that they are not retail individuals but are organisations and entities. They might include:

• Banks
• Corporations 
• Investment funds
• Pension Funds
• Endowment Funds
• Sovereign Wealth Funds
• Insurance Companies 

They often have funds in crores to invest. Individual investors on the other side typically have a much lesser amount with them. Nevertheless, an HNI can allocate to some types of institutional investors. These can include hedge funds which have minimum investment and are only open to accredited investors.

WORKING OF INSTITUTIONAL INVESTORS

An institutional investor often works by having a large sum of money to invest on its own or on behalf of others. For instance, a pension fund can have crores collectively from those who contributed to it. It then might turn to professional institutional services from an asset manager rather than opening up a brokerage account as a retail investor. 

A mutual fund can also be taken into as an institutional investor. Even though the investment into mutual funds might come from retail investors, the mutual fund then collectively has bigger funds it can invest. An institutional investor can invest own funds as well. For instance, an insurance company uses the premium from its subscribers to invest and gain returns that can be used to pay out insurance claims. 

Due to their complexity and size, institutional investors often receive separate, more complex services from financial services firms. A bank for instance, generally won't provide the same service to retail investors with some lakhs of rupee in a checking account that it will offer to an institution that has funds in crores at least. The institution might have access to additional services ranging from investment research to securities lending. 

RETAIL INVESTORS AND INSTITUTIONAL INVESTOR 

While you may not be an institutional investor, chances are they play a vital role in your finances, whether it be your bank providing the financial services, a pension fund providing retirement benefits or insurance company providing the policy. It can affect a retail investors portfolio more significantly when they are managing individual investments along with other investors' portfolios. For instance, if you have invested in a fund, the returns will now depend on how well the institutional investor (The AMC of mutual funds) manages the holding funds.