Role of Institutional and Small Investors | Capital Market | India
Keywords:- Institutional Investors, Retail Investor, SEBI
AUTHOR: NEETI SOLANKI
Capital market in India is very flexible in terms of accepting the investment. There are many types of investors and many types of investments two of them are explained below:
Institutional investors
The Institutional investor by term it sounds like they are individual investors but that is not true. Institutional investors are organizations or a company that pools the funds of different individuals together to invest it in a variety of schemes, funds etc. according to scheme or directions of the investors.
Following are the types of institutional investor:
- Banks
- Pension funds
- Insurance company
- Hedge funds
- Venture capital funds
- Mutual funds
- Real estate investment trusts
- Credit unions
If we compare individual retail investors from institutional investors, the latter tend to have a greater market influence. They are backed by portfolio managers who help them to calculate risk and take trade decisions. The capital market is governed by Securities Exchange Board of India and SEBI Regulations. Accordingly the investments made by institutional investor are also governed by Securities Exchange Board of India and SEBI Regulations.
Example of Institutional Investors
The leading institutional investors are BlackRock, Vanguard Asset Management, State Street Global Advisors and many more. These are all regulated by SEBI so that they can cause adverse effects in the capital market of the economy.
Foreign institutional investors are the type of institutional investors. This term is commonly used in India which refers to outside investors who invest in the country’s financial market. By definition, foreign institutional investor is an investor or an investment fund investing in a country other than the country in which it is registered. Foreign institutional investors are allowed to invest in primary as well as secondary markets of India under the country’s portfolio investment scheme.
Limit of investment by foreign institutional investors
Foreign institutional investors are generally limited to 24% of the paid-up capital of the Indian company receiving the investment. However, FIIs can invest more than 24% if the investment is approved by the company’s board and a special resolution is passed. The ceiling on FIIs’ investments in Indian public-sector banks is only 20% of the banks’ paid-up capital.
The Institutional investor are often called market makers of the capital market. Their investment amount is very huge and they invest in a variety of securities. They have a diverse portfolio. Presence of institutional investors creates a very positive effect in the capital market and the economy of the country. There are many benefits provided to them by the Securities Exchange Board of India under SEBI Regulations. For example there are many securities whose access is not allowed to retail individual investors, but there access is allowed to institutional investors. There are a type of securities which are reserved for institutional investor. In India, institutional investors are encouraged and promoted. Schemes, policies, guidelines are made considering them. It is very important to understand the one minute difference between mutual fund and institutional investor, that is institutional investors are an enterprise managing fund and not mutual fund itself.
RETAIL INDIVIDUAL INVESTORS
Every person who buys and sells or invests in equity, debt, or other securities in the capital market of an amount not exceeding twenty thousand rupees (Rs.20,000) through either himself or through an agent or a broker or by any other mode is known as retail individual investors. They are non institutional investors. Contrary to institutional investor they don’t have access to the perks and benefits available to the institutional investors.
Retail investors invest only a small amount in the market according to their risk appetite. Retail investors who are wealthy also have the option to invest in private equity and hedge funds. People always believe that retail individual investors are not well equipped and lack the knowledge required to invest in the capital market. As a result of which they are more likely to bear losses. They have fewer resources and skills to look for a better investment option which provides them good returns. Retail investors invest their own money and institutional investors invest and manage on behalf of someone else.
An investor who makes small size trades are also called pikers. They have freedom to invest in a company of any size, this benefits them as it provides them a varied range of options to invest in. They always have the opportunity to take advantage of small firm effect. If a company brings an initial public offer through a book-building process, it is compulsory to reserve some part (as may be prescribed) for retail individual investors. The Institutional investor appoint agents for monitoring the trade and appoint someone to the trade for them. But retail individual investors are more likely to do the trade and monitor the trade by themselves.
Conclusion
Although retail investors invest very less as compared to institutional investor but they play a major role in stabilizing the capital market. They save the capital market from being dominated by institutional investors. There role is equally important and their value doesn’t depends on the amount they invest in the market. Retail investor tends to invest for a longer period of time which benefits the company. They have three basic return expectations i.e. return on capital, return of capital and liquidity. Retail investor can add small cap, mid cap stock and large cap stock at their will. They tend to invest as a way of channelizing their savings and earn profits, their main intent is not trading and making it their main business. There risk appetite is comparatively low as that of institutional investor.
Both are equally important, also play a major role in stabilizing, running the market smoothly and not letting each other dominate the market.
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