A professional or non-professional person or companies that invested in large enough share amounts or dollar amounts that they succeed for privileged treatment and minor commissions. Institutional investor's appears fewer shielding principles because it is expected that they are more knowledgeable and better able to protect themselves.
So here I describe little bit about my Clint Mr. Kalicharan, who is a 25 year old mechanical engineer who has just ongoing his career in the field of construction industry and working for a multinational company in Mauritius. He has several years over which he can do regular savings. As an investment mentor working for Mauritius commercial bank in Mauritius, I will advise my client in construction of investment portfolio comprising of different financial assets. The portfolio would be worth MRU 500,000 and into various institutional investments such as mutual funds, insurance products and bank deposits, as per investor's needs. Even he wishes to invest in an insurance policy which provides cover for his beneficiary in case of his death and also for him in case of infirmity or accidents. Institutional investors are huge organizations such as pension funds, mutual funds, banks, insurance companies, hedge funds, and exchange-traded funds, which puddle large calculations of money and invest person's calculations in securities, real properties and other financial assets/ financial claims. They also incorporate functioning firms which obvious to invest their earnings to some extent into these types of assets, for example- hedge funds. Institution investor are focused financial instruments handling saving mutually on behalf of small retail investors towards particular objectives in terms of return, risk and maturity of claims ( Davis, 1996).
Main types of Institutional investments:
Pension funds:
A fund recognized by an employer to simplify and establish the investment of employees' retirement funds subsidized by the employer and employees. The pension fund is a mutual asset pool intended to yield stable progress over the long term, and provide pensions for employees when they extent the end of their working years and originate retirement. It is an agreement for a fixed sum to be paid regularly to a pensioner, particularly following retirement from service. They are complicated in assembling and investment of funds for future pensions, contributed by sponsors and members.
2.2 Insurance companies:
Insurance is the reasonable allocation of the risk of a loss, from one object to another in conversation for payment. It is an agreement of risk mainly used to hedge against the risk of a provisional, indefinite loss. Life insurance provides insurance against risk of death, and also tool for saving and non-life like car and house insurance. (Kane, Edward)
2.3 Mutual funds:
It is a form of saving and investment which are instruments for combining of assets to obtain a better risk/return trade payoff. Retail investors opt the type of asset they invest in and are allowed to buy and sell at current market prices (Gregoriou, n.d.).
Advantages and Disadvantage of Institutional investments:
Large interchange volume enables a better risk/ return trade payoff then is possible by direct holdings.
Restriction of Objective: They have to work within the outline, which they decide before presenting the scheme.
Economies of scale: Higher capacities of trade and distribution skills of expert managers help to achieve economies of scale.
Cost: Investors have to bear the operating expenses, Management fees and other charges which affect the returns.
Professional Management: One of the striking features of Institutional investments is the service of professional management at a very reasonable cost.
Transparency Issues: The investment performance can be manipulated or there can be window dressing issues.
Liquidity: They invest in large liquid assets to mitigate and diversify their risk at any given time (Singh, 2013).
Strategy of Investment:
The mutual fund portfolio must be a balance between age and risk craving of the investor. Usually, young investor earns an unassuming income and holds an important prospective for growth up the ladder and has long horizon for saving. It makes the investor apart as aggressive and keen to take risk with his investment. Their preliminary high risk portfolio distribution can change with age, emergencies or monetary obligations. Typical allocation ratio of mutual fund should be debt funds 20% and equity funds 80% (Sriram, 2004). Out of MRU 500,000, the investment into diversified mutual funds would be MRU 300,000.
4.1 Fixed deposit: Mr. Kalicharan Amount of 1000,000 would be invested in fixed deposit in 5 different banks in Mauritius like HSBC, SBM, MPCB, and SBI. This will maintain the deposit and another advantage is that if Mr. Kalicharan needs the amount in case of emergency, he won't have to break the entire amount. He will have to pay the premature withdrawal fine only for the amount that he needs, even as the rest of the amount keeps growing (Iyer, 2012).
4.2 Insurance: After an analysis of product offer from different insurance companies and keeping in mind Mr. Kalicharan needs, I would like to advise him to invest in single premium endowment policy offered by New India Assurance. This policy is suitable for him since he can pay one single premium instead of paying regular monthly premium. It is very valuable as he can invest a single amount and then may receive occasionally heritage, bonuses, survival benefits, etc. The advantages from this policy are as follows:
Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event. (New India Assurance)
Planning for life stage needs - Life Insurance not only provides for financial support in the event of early death but also acts as a long term investment. It can meet goals, be it cover in future children's education. Endowment life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values.
Builds the habit of saving - Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.
Safe and profitable long-term investment - Life Insurance organism a long-term savings instrument, also ensures that the life insurers center on returns over a long-term and do not take risky investment decisions for short term gains.
Assured income through annuities - Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life. (The New India Assurance Co. Ltd.)
Performance evaluation:
Mr. Kalicharan requirements to invest MRU 500,000, I would like to suggest him to construct the portfolio by investing in different type of Institutional investment:
The mutual funds investment should be in the ratio of debt 20% and equity 80%, behavior in mind the age and risk captivating ability of the investor. Again, equity based funds should be diversified to diversify the risk.
The mutual fund allocation:
Risk level and Risk adjusted Returns. Normally, 5 years data should be considered to appraise the performance, but due to the economic crisis the 5 years performance has been majorly valuable. Risk level is measure by Standard deviation (SD) and Beta (β), Sharpe ratio and Treynor ratio is used to determine the risk adjusted returns. This is will adviser to invent the portfolio based on the performance.
Sharpe Ratio:
Sharpe Ratio=
Where, Ra is the asset return, Rb is the risk rate of return, σ is the Standard Deviation and
E[Ra-Rb] is the expected value of the excess of the asset return over the benchmark return.
Treynor Ratio (T):
T = \frac{r_i - r_f}{\beta_i}
where:
T \equiv Treynor ratio,
r_i \equiv portfolio i's return,
risk free rate
Beta (β):
\beta_i \equiv portfolio i's beta
Conclusion:
This Portfolio has been composed maintenance core principles in mind like age, appetite for risk, financial responsibility. The Single premium endowment policy will give good return guaranteed with bonus upon maturity along with life cover for recipient in case of death. The fixed deposits will balance the risk level to an extent and maintain the capital. The debt fund has reasonable returns but the risk level is low. The investment in equity funds have been diversified and funds have been chosen based upon the investors financial needs and performance of the funds like annual returns, standard deviation, Sharpe ratio and Treynor ratio. The expected average returns from the portfolio apart from the insurance policy investment would be 23.97% and the average standard deviation for the mutual funds would be 0.378. The composition of the portfolio would be as follows:
Name
Type of Institutional Investment
Amount
Expected Returns
New India Assurance endowment policy
Insurance
MRU 100,000
Bonus
Fixed Deposit
Banks
MRU 100,000
3.97%
Blue Chip Bond Selection India Fund - USD (CINDBDF)
Mutual Fund - Global Debt
MRU 100,000
6.10%
Caldora Emerging Markets Fund EUR - EUR (CALEMEE)
Mutual Fund - Index Fund
MRU 100,000
53.30%
Enhanced Index Funds PCC-Enhanced Malaysia Index Fund - Mauritius Master Fund - Weekly(EMIFDEX)
Mutual Fund - Index Fund
MRU 100,000
29.10%
Referencing:
Online source from <http://www.bloomberg.com/markets/funds/country/mauritius/>
Singh, T. P. (2013) Advantages of Institutional Investment. Lecture delivered for module M07EFA at IBS College.
Kane, Edward J. & Min-Teh Yu, 1995. "Measuring the true profile of taxpayer losses in the S & L insurance mess," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1459-1477, November.
Iyer, R. R. (2012) 'Five tips for investing in fixed deposits'. The Economics Times 28th May, available from <http://articles.economictimes.indiatimes.com/2012-05-28/news/31878000_1_premature-withdrawal-deposit-insurance-corporate-deposits>
Sriram, K. (2002). 'Is your MF Portfolio in sync with your age?' The Economic Times (n.d.), available from <http://economictimes.indiatimes.com/is-your-mf-portfolio-in-sync-with-your-age/slideshow/7386435.cms>
Elton, Edwin J., Martin J. Gruber, Sanjiv Das, and Christopher R. Blake, 1996, The persistence of risk-adjusted mutual fund performance, Journal of Business 69, 133-157.
Redhead, K. (2008). Personal Finance and Investments: a behavioural finance perspective. Routledge.
Gregoriou, A. (n.d.) 'Institutional Investors' Money Banking and Finance (n.d.) available from
<http://www.economicsnetwork.ac.uk/sites/default/files/Kent%20Matthews/Lecture%209%20Institutional%20Investors.pdf>
Carhart, Mark M., 1995b, Survivor bias and mutual fund performance, Working paper, School of Business Administration, University of Southern California, Los Angeles, Cal.
Staff, (2012) 'What is the Difference between Retail Investors and Institutional Investors?' Investorguide 22nd Oct, available from
<http://www.investorguide.com/article/11202/what-is-the-difference-between-retail-investors-and-institutional-investors/ >
Davis, P. (1996) 'The Role of Institutional Investors In The Evolution Of Financial Structure And Behaviour' Financial Markets Group. London: London school of Economics.
Shetty, S. S. (2013) Institutional Investment. Student at IBS College.
