An institutional investment is where the pool of investments takes at one place and these investments are diversified into varies investment options with the help of fund manager. Total investment done by institutional investment companies are managed by asset Management Company according to the investor's criteria (Andrews, M. & Hill, H. 2003),. There are several types or institutional investments some types of funds carry high risk with high returns and some has low risk and with low returns.Main role of institutional investment is collecting funds and investing into different sector according to the investor preference (Alex Kane & Mohanty 2009),.
There are severalmodes of investments such as pension funds, mutual funds, equity funds, insurance, hedge funds etc. institutional investors plays an active role in all investments and there the active players in terms of economic factors (Tepper, 2003.). According to investor profile institutional investor will decide type of investment; age will play an important role on the type of investment, returns and also the level of risk. In these institutional investments costs and taxes will play a major role in the returns where as this taxes and costs will shows impact in long term than short term (Brown keith, C 2004).
Classification of the investments:
Pension funds:
These are the major part of institution. Pension fund is the contract for paying fixed sum of amount regularly to the person after retirement. The person should pay a sum of amount in installment before retirement. Sum of amount will vary according to the type of pension fund ( Richard & Daniel Tommasi, 2001),.Pension funds are well known as benefit funds traditionally it provides a safety and security while retirement
Insurance and deposits:
insurance companies protect investors from risk by providing future clime the insurance.Deposits will carry low risk and low returns in short period and high returns in long period Deposits will provide additional security (Iyer, R. R. 2012).
Mutual funds:
It is an investment program where a several investments take place and diversified in to various market sources.This funds was managed by assert management company mainly aimed to generate profit of the investor whereas there are two types of mutual funds debt funds and equity funds in terms debt funds are more safer that equity funds these two funds are segregated in to different types of funds each funds carry different types of risk level and different returns (Fink, Matthew P. 2008)..
Advantages of Institutional investments:
Diversification of funds with less risk with high returns.
High volumes of trade between one country to another country will help to balance economies of scale
Helps to balance liquidity and diversify the risk (Singh, T. P. 2013).
Disadvantages of Institutional investments:
Huge investment at single time will affect macro economy (Alex Kane & Mohanty 2009),.
Service charges and other charges will shows a more impact on the returns in long term.
Lack of transparency will confuse investor to understand the investments (Singh, T. P. 2013).
Investment details:
Name
Age
Investment
Level of Risk
Mr. Kalicharan
25
100,000
High
Mr. Nagarjuna
38
500,000
Neither take risk or safe
Mr. Chettiyar
55
100,000
low
The above investors details reveals that three investors are different age group as Mr.kalicharan age is 25 years, as he just started his carrier he has possibility of taking more risk which contains high returns . In case of Mr. Nagarjuna, he is in middle age of 38 he is in the plane of neither take risk nor safe this profile tells that investor can't take more risk, where as in case of Mr. Chettiyar he is a retired person so this profile describes that investor at this age group will not take risk.
As an investment advisor for Mr. Nagarjuna 38 year old investor who is working senior manager in a super market. As he is a middle aged person he will not take complete risk as a family person. Even though there is a possibility of taking high risk keeping in mind of his son dreams I would like to suggest him 40% debt and 60% equity. As in this point he can gain higher returns and also he will be in less risk. Where there is a possibility of taking risk there is a high returns keeping this theory mind and investor profile, investment of 500,000 MAU has segregated in to various investment such as mutual funds , insurance and pension funds. According to investor needs he wish to invest in pension funds as his wish to be safer in future and remaining is invested in to debt and equity ( Taylor, Don , C 2005)..
Investment strategy:
Investment strategy will vary according to the investor'sprofile. Age will play an important role in investment and age will play an important role in risk factor and long term and short term investment (Asquith Paul & David Mullins 1996). Financial needs of the investors will decide the investment period and also risk level. In comparison mutual funds gives better returns in long term than equity . Mutual funds diversify the risk because all funds are managed by professional investment advoiserprovoide a path way for the investor to invest and get good returns. Considering age factors funds are designed to provide transparency for the investor (Singh, T. P. 2013).
According to the investor's age and his mind set investment of 500,000 MAU has been distributed to various investment sources like pension fund, fixed deposit and mutual fund.
Pension fund: As investor wish to spend peaceful life, so 50,000 MAU was invested in pension fund which provides income after retirement.
Fixed deposit: This type of investment are more risk free even though it provides less returns in short term compared to mutual funds and other investment options. 100,000 MAU was invested in two banks.
Mutual funds: Mutual funds will vary according to the investers age criteria. Keepin this in concern 40% investment in 350,000 was allocated to debt funds and remaining 60% is allocated to equity funds.Evaluation of funds is done in different valuation methods like beta, sharp, standard deviation and Treynor and investment is done in the funds which has low risk factor and better returns.
Evaluation tools:
Sharp ratio:
Sharp ratio is considered as a economic tool with high accuracy to calculate risk compared in terms of returns (Willim F 1994).
Ra= asset returns, Rb= Returns on benchmark assets
Beta ratio:
Beta ratio is the relation between the benchmark and the asset. This ratio will accurately explain the factor if index whether it is positive or negative as B<0 it indicates negative moment where as asset moves in opposite direction, B=0 it indicates no change in market means market is stable and B>0 indicates market index is very strong (Willim F 1994)..
Treynor ratio:
Treynor ratio is well known as Treynor index it calculate the excess returns according to the market risk (Singh, T. P. 2013).
Ri = Portfolio return, Rf= Risk free rate and Bi = Portfolio beta
Investment Composition:
MR. Nagarjuna investment of 500,000 MAU was invested into three different investment types and allocation of amount was shown in the below table:
S. no
Investment
Amount
Category
Organization Name
1.
Fixed Deposit
50,000 MAU
Fixed Deposit
Mauritius Commercial bank
50,000 MAU
Fixed Deposit
State Bank of Mauritius
2.
Pension Fund
50,000 MAU
Retirement Fund
National Pension Fund
3.
Mutual Funds
140,000MAU
Global Debt Fund
The Two Seasons Pcc- 21st century
105,000MAU
Region Fund
Africa Consumer Fund
105,000MAU
Sector Fund
Indian Parma Fund .LTD
According to the investor's profile and keeping his son's engineering dream investment funds have been segregated into fixed deposit, pension fund and mutual fund. 50,000 MAU was allocated to the pension fund where as investor wish to spend peaceful life so this investment provides returns after his retirement as every month fixed sum. 100,000 of fixed deposit is the risk free investment when ever investor want money he can break the bond and this give 3.65% of returns. As his funds give security for the investor in case of emergency retrieval of money is available in any cases.A mutual fund investment is segregated according to their performance the evaluation of performance was shown the table (2.2).
Performance and evaluation of funds:
Evaluation of performance was carried out for various available funds in that best funds were selected and listed below and remaining funds and their performance was provided to the investor for the better an idea on funds.
Name of Fund Company
Type of Investment
SD
Beta
Sharpe
Treynor
Returns
Mauritius Commercial bank
Fixed Deposit
-
-
-
-
3.5-4.0%
State Bank of Mauritius
Fixed Deposit
National Pension Fund
Retirement Fund
-
-
-
-
Contributory Benefits
Two Seasons PCC- Century fund (TS21STC)
Global Debt Fund
0.59
0.42
0.71
0.09
4.5-6.0%
Africa Consumer Fund (ARIAFRI)
Region Fund
0.19
0.51
0.77
0.27
5.0-7.0%
Indian Parma Fund .LTD (INPHRMA)
Sector Fund
0.52
0.57
0.54
0.49
3.0-5.0%
Investment was allocated for only best companies and which have high returns according to performance in three conjugative years.the performance was evaluated according to the standard deviation, sharp ratio and Treynor ratio was show in the above table.
Above investment option is provided to the investor according to the investor idea, age and risk level. Fixed deposit will carry 3.5 % to 4.05 of expected returns once investment get matured as the fixed deposit bond breakage will have different returns it vary according to the bank's policy. Customers can clime loan under their fixed deposits without breaking fixed deposit bond so this investment is considered as a risk free investment. Whereasannual returns of Global debt fund of three consecutive years is around 0.06, region fund is 0.01 and for sector fund is 0.03 this figures clearly tell that three companies have positive returns this helps to predict returns and also less risk and good returns investment. Even though region fund has less return compared to remaining funds sharp ratio tell that risk level is low compared to remaining funds based on this risk level 105,000 MAU investment was allotted to the particular fund. Similarly Global debt fund has high risk level compared to region and sector fund but it has lower treynor ratio in comparison for that reason 140,000 invested in this particular fund.
Conclusion:
To sum up investment was done in several funds and saving keeping in concern of investors risk acceptability, age and his further commitments. Whereas even though there are several investment options available have valuated some funds which has lower risk level and high returns and given to the investor. Over all sum of amount is allocated to fixed deposits keeping in mind of his sons dream, retrieval of money from fixed deposit will help the investor in case of emergency and provide security. Pension fund is allocated in future concern of the investor as his wish to lead happy and peace full life this fund help him after retirement and get fixed sum so this fund is allocated according to his profile. Mutual funds plays an important role in investment 40% of debt and 60% of equity is allocated to the investor keeping in mind as debt funds are more secured in comparison of equity funds. equity funds was invested region fund and sector fund this funds was selected according the past performance of the funds in three consecutive years performance evaluation was taken place by calculating Beta, standard deviation, sharp andTreynor ratio and suggested to invest on the best performance funds.
References and Bibliography:
Alex Kane & Mohanty (2009), "Institutional investors" Tata McGraw 8th Edition.
Brown keith, C (2004) " Analysis of investment management of portfolios" cenegage learning 9th edition pgno: 99
Richard & Daniel Tommasi (2001), "Pension Fund Investment in Infrastructure: A Resource Paper", Capital Matter No.3
Taylor, Don , C (2005). " Financial Planning: Process and Environment" The American College Press.
Fink, Matthew P. (2008). "The Rise of Mutual Funds" Oxford University Press.
Iyer, R. R. (2012) "investments 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> [27th January, 2013]
Andrews, M. & Hill, H. (2003), "Institutional Investor Behavior" Michigan Law Review under Limited Regulation 1997
Asquith Paul & David Mullins(1996), "Equity issues and offering dilution" Journal of finance economics15. Pgno : 61-65.
Tepper, (n.d.) "institutional investments features" [online] available from < http://www.tepper.cmu.edu/index.aspx> [23rd january2012].
Singh, T. P. (2013) "Institutional Investment". module M07EFA at IBS
Willim, F (1994) " The sharpe ratio journal of portfolio management" [online] available from <http://www.iijournals.com/doi/abs/10.3905/jpm.1994.409501> [ 29th January 2013]
