Investors or investment funds that do not belong to the country in which they are currently investing are called foreign institutional investors. Such investors are from another country, or are registered in a country outside the country in which the investing is being done. Insurance companies, mutual funds, hedge funds and pension funds are all examples of institutions that are involved in foreign institutional investments.
Institutional investors are companies that collect and invest large sums of money, into assets like securities, property and other such investments. Operating companies that choose to invest a part of their profits into such assets are also called institutional investors. There are six basic kinds of institutional investors. They are pension funds, endowment funds, insurance companies, commercial banks, mutual funds and hedge funds.
They perform the duty of highly specialized investors acting on behalf of others. For example, let’s say a salaried individual will get a pension from his employer. The employer hands that employee’s pension contribution to a fund. The fund uses the pension amount to purchase shares, or another kind of financial product in a company. Such funds are valuable because they have a vast investment portfolio in numerous companies. The benefit of this is that the risk gets spread. This means that if one company fails, only a very minor part of the entire fund’s investment will be at stake.
Investments made through institutional investors have a number of benefits for a retail investor. These benefits are:
• The investments are able to influence the solvency of a company.
• An investment by a large institution acts as an anchor investment for other institutions to invest in that particular company/stock, thus increasing its value.
• The institutional investments are safer as there is a wide range of domain knowledge used before making such investments and also such investments are diversified into several companies or asset classes.
• The risk of such investments is not as high as that of investments made by non-institutional investors, as the investment portfolio is vast and diversified. In case of corrosion in value of one asset class, the entire corpus would not be greatly affected.
• The corporate governance is better enforced by institutional investors.
A lot of institutional investors are very interested in private equity as an asset class. This is because private equity has promising benefits in terms of diversification. The returns of private equity can be higher than that of other investments, but they are also more risky and are high beta investments. Institutional investors usually carry out very different and varied investment strategies for private equity. Because of the high level of market confidentiality as well as the limited amount of academic scrutiny, not much is known about the performance and basis of these investment strategies.