Institutional Vs Individual Investor – Key differences every investor must know!
Most of us common people invest our savings and wealth into passive investment options. Our investment forms a very minute part of the whole market ecosystem and thus does not largely affect the demand and supply in the market. Every investment market be it real estate or stock consists of a variety of investors. These categories vary according to their investment size, natural and artificial person, country of origin, and so on. Some of the common categories of investors are Foreign Institutional Investors, Domestic Institutional Investors, High Net Worth Individuals, and Retail Individual Investors.
Among the above 4 categories, the broad classification boils down to two types of investors. They are:
In this article, we aim to simplify and highlight the striking differences between the above two types of investors, and their role in the real estate sector.
Who are Institutional Investors?
In the category of ‘Institutional Investors’, a large group of investors or as the name suggests ‘Institutions’ invest in the profitable securities market like real estate, stocks, derivatives, and so on. These institutions manage large pools of investment contributed by small investors or even some of the High Net Worth investors. Since the size of the transactions carried out by the Institutional Investors is huge, they are majorly responsible to drive the prices up or down. Thus, huge market movements are attributed to institutional investors for buying or selling securities and assets. Institutional investors have an edge over individual investors due to large-scale operations and the availability of high-quality analytics and financial acumen of established fund managers.
Some of the well-known examples of Institutional Investors are:
Real Estate Investment Funds
Real Estate Investment Funds pool in the investments from individual investors with smaller contributions and invest them in Institutional Grade properties. These properties are high-yielding and have greater potential for capital appreciation. Real Estate Investment Funds conduct their due diligence to filter out the best properties that can yield high returns. Some examples of Institutional Grade properties are Premium Office Spaces, Co-working spaces, Airport Leases, Shopping Malls, Resorts and so on.
Mutual Funds are one of the famous types of ‘Institutional investors’. Mutual Funds invest on behalf of their investors into various securities based on the type of the fund. Mutual Fund companies employ a group of expert fund managers that calculate the risk profile and available opportunities to maximize the fund returns. For this, the Mutual Fund charges an expense ratio to its investors as asset management fees.
Insurance companies collect insurance premiums from individuals to provide life cover or health cover for predetermined conditions or death. These premium funds collected are invested into a diversified portfolio of assets that multiply the funds. Some of this corpus is utilized for settlement of the claims and the rest as business profits and can be reinvested.
Private or PSU Banks have to invest a specific percentage of their deposits inflow into Government Securities to comply with the Statutory Liquidity Ratio norms set by the RBI. For this, banks have to invest a certain percentage of their deposits in securities like bonds, Treasury bills, and so on. Since the size of the investment is huge and not done by any individual but an institution, banks are also classified as Institutional Investors.
Apart from these well-known institutional investors, others include:
- Hedge Funds
- Pension Funds
- Venture Capital Funds
Thus, institutional investors are the seasoned players in the investment market they operate in!
Who are Individual Investors?
Individual Investors are common people who invest in securities on an individual level. Generally, individual investors have limited capital to invest and their investments are for personal goals. Individual investors a.k.a retail investors have to operate in the securities market through a registered broker or a dealer and cannot operate without the mediators. Since the operational scale is very small, retail investors do not affect the market momentum on a large scale. Moreover, retail investors trade less as compared to institutional investors to minimize the losses. The access to financial happenings is limited and hence, retail investors are the laggards to gauge the market sentiments
The Individual Investor category is further classified based on the Net Worth of the investor:
Retail Investors are those who apply for less than ₹2,00,000 worth of shares in an IPO Market.
High Net Worth Investors
These investors apply for more than ₹2,00,000 worth of shares in an IPO Market
As we understand the overview of Institutional and Individual Investors, let us take a look at key differentiating factors between both the type of investors:
Size of Investment
Institutional Investors account for huge and bulk investments in the securities market.
Individual Investors form a minute part of the whole investments undertaken in the securities market.
These investors have greater access to financial resources and analytics along with first-hand information about the market happenings
These investors have limited access to financial resources and often incur additional costs for portfolio management.
The overall cost required to maintain the assets is lesser as bulk investment policy is used by fund managers.
The cost of investment is high if personalized services are availed through the broker. The cost of transactions gets reduced if discount broker services are availed
Access to Securities
More access to securities like debentures, preference shares,institutional-grade properties and so on.
Individual investors have restricted access to high ticket size securities.
With the above difference, institutional investors and individual investors have fairly different exposure to any particular asset. Both kinds of investors have their pros and cons. At the same time, their investment goals vary on a broader level. Institutional Investors maximize returns for the entire fund and thus make frequent buy and sell calls to maximize profit. On the other hand, individual investors are keen on making profits but generally hold for the long term to avoid high volatility. In real estate, fund houses make a bulk investment in real estate projects through pooled funds from investors. But, since individual investors have limited capital, they invest in a limited number of properties throughout their lifetime.
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Institutional Investor Vs Individual Investor FAQ's:
Institutional investors are fund houses that manage and invest bulk money in the securities market to make profits for their customers. On the other hand, individual investors invest in smaller proportions to reap returns for themselves.
An institutional investor in real estate can be a Real Estate Investment Funds or REIT who purchase high-ticket size properties on behalf of their clients to maximize yields.
Institutional investors are fund houses that manage and invest bulk money in the securities market to make profits for their customers.
The commonly known 4 investors are Foreign Institutional Investors, Domestic Institutional Investors, High Net Worth Individuals, and Retail Individual Investors.
No, an individual cannot qualify as an institutional investor as he/she invests for personal gains and the investment size is smaller.
Institutional investors like REITs invest in real estate to make consistent passive income through rentals and capital appreciation.
An institutional-grade property can be any property that qualifies for the large ticket size with amazing potential for rental yields and long-term capital appreciation.