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Institutional Investment

Institutional investment is a kind of investment, which is done by a financial-services providing organization. The most common examples of institutional investments are insurance companies, a bank, a hedge fund, a retirement fund or a mutual fund. 

Institutional investment is a form of financially advanced investment and it is invested in substantial volumes. Institutional investment portfolios normally have a large number of investments. 

Due to the advanced characteristics of institutional investment, the institutional investors are frequently involved in private security placements where particular features of the securities regulations are not enforced. For e.g. in the U.S., a private placement can be done with an accredited investor excluding the requirement of enlisting the bidding of securities with the Securities and Exchange Commission (SEC). 

In recent years, the gradual increase in international portfolio diversification within the UK institutional investment community has led to a growing need to manage foreign exchange risk. It reports on the findings of a postal questionnaire survey relating to foreign exchange risk management practices in UK institutional investment organisations. The findings demonstrate an increasing awareness of the foreign exchange risk management problem and indicate that UK investment institutions actively manage foreign exchange risk within their investment portfolios. The findings also focus on the question of whether UK institutional investors manage their own portfolio’s foreign exchange risk, simultaneously concerning themselves with their investee companies’ foreign exchange risk management practices. 

Describing what a foreign institutional investor or investment is or does, requires more than just detail. Foreign – means that the individual or entity doing the investing is not a resident of the country in which the investment is made. Institutional – means that the business or company doing the investing is not a single, private individual who chooses to put money into a project or scheme. This means that a mutual fund, which gets its operating money from various individual investors, might be an institutional investor. An insurance company or a pension fund could also qualify under the institutional investment definition. In simple term, a foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. Foreign institutional investors are actually the outsiders in the financial markets of the particular company. 

A foreign institutional investor is a legal entity such as an investment fund or mutual fund that puts money into a business venture or project in a country other than the one in which the investor lives or is based. 

In a country like India, for e.g. a corporation or mutual fund from the United States or Europe might put money into the Indian markets for the purpose of making a profit. In most cases, this means that this entity from the U.S. or Europe must be registered with the Securities and Exchange Board so that it can participate in the financial system of India. In a similar manner, a European fund or business entity looking to invest might put money into the financial market in the U.S. Under the usual circumstances, this European fund must be registered with the Securities and Exchange Commission of the U.S. One specific situation involves India’s financial market, which needed a flow of investment capital into the country in the early 1990s. At the time, this was carefully considered, though there was some sense of urgency because of the need for the stability that new, foreign money could provide. Countries generally encourage sound institutional investment from other nations so that it won’t be necessary for the government or corporations to increase their debt by borrowing money. 

Some university studies of the influence of foreign institutional investment capital show that the massive inflow of money made strict regulation and limits necessary. The government and the financial institutions of the ‘receiving’ country were fearful of opening up the markets to quickly or allowing too much foreign capital at one time. United States has seen a significant increase in the number of foreign institutional investors in the last decade or two. China and Japan have made serious inroads into the financial markets of the U.S. during this time. 

The types of institutions that are involved in the foreign institutional investments are:

  • Mutual Funds
  • Hedge Funds
  • Pension Funds
  • Insurance Companies

The economies like India, which are growing very rapidly, are becoming hot favourite investment destinations for the foreign institutional investors. These markets have the potential to grow in the near future. This is the prime reason behind the growing interests of the foreign institutional investors. The promise of rapid growth of the investable fund is tempting the investors and so they are coming down in huge numbers to these countries. The money which comes through the foreign institutional investment is referred as ‘hot money’ because the money can be taken out from the market at anytime by these investors. 

The foreign investment market was not so developed in the past. But once the globalization took the whole world in its grip, the diversified global market became united. Because of this, the investment sector became very strong and at the same time allowed the foreigners to enter the national financial market. 

At the same time the developing countries understood the value of foreign investment and allowed the foreign direct investment and foreign institutional investments in their financial markets. The foreign institutional investments are unpredictable. In a country like India, the Securities and Exchange Board looks after the foreign institutional investments. 

Investments through institutional investors have the following advantages:

  • Ability to influence a company’s solvency.
  • Safe institutional investments; owing to their vast domain knowledge.
  • Influencing the conduct and capital requirements of listed companies.
  • The risk is low in institutional investments than that faced by non-institutional investors owing to a broad and diversified investment portfolio.
  • Active involvement and influence in corporate governance.

The importance of institutional investments may vary. Sovereign wealth funds in oil-exporting countries are quite significant and on the other hand, pension funds are highly popular in developed economies.