Investment Constraints & Investor Categorization

Investment Constraints 

There are Some constraints be there in Investment also.Investor Goal/Objectives can reach only it has overcome all these Constraints.An Investor seeking fulfillment of one of the above goals operates under certain constraints also .The Constraints affecting Investment are

• Liquidity 

• Age 

• Need for Regular Income 

• Time Horizon 

• Risk Tolerance 

• Tax Liability. 

 Investor Categorization 

For a successful investment policy, investment objectives and risk tolerance have to be a blend of constraints and preferences of the investors. Each investor has his/her own set of objectives and constraints. While most of these are known only in qualitative terms, they will eventually lead to form quantitative objectives and constraints by the Investment manager, which, in turn, form the basis for the formulation of the optimal portfolio.The Two broad Category Of Investor are

Institutional investors

‘Institutional investors’ are the financial institutions or organizations, which 

collect and invest money on a long-term basis on behalf of individuals or 

corporates. They include pension funds, life insurance companies, general 

insurance companies, investment trusts, and unit trusts. In India, the dominant institutional investors are the Life Insurance Corporation of India, General Insurance Corporation of India, Unit Trust of India, and other approved Mutual Funds. In recent years, Foreign Institutional Investors (FIIs) have also been active players in the Indian stock market. These institutional investors have exerted an important influence on capital markets all over the world. They play an important role in the management of corporations as they are entitled to voting rights. They also engage in corporate governance activities. They have freedom to buy/sell shares. They are more knowledgeable and better protect themselves.

  

Individual investors

As against institutional investors, ‘Individual investors’ are those who purchase small amounts of securities. They are also called retail/small investors. They generally treat risk as ‘the possibility of losing money’ or sometimes even as ‘losing money’. Individual investors can be categorized based on their psychological characteristics such as being an introvert or extrovert, aggressive or conservative, confident or uncertain, etc. Investment policies of the investors can be laid down based on what the investors think is best for them while often, the investment policies of the institutions are determined to a significant extent based on various legal requirements. For example, in India, the government lays down the investment pattern of provident funds and also insurance companies and the freedom available to portfolio managers while handling the portfolios of these institutions is limited. Investment policies of the individuals generally become complex as they are subject to taxes. Allocation of a significant portion of the portfolio to tax-saving investments makes the job of a portfolio manager much more difficult as the returns have to be brought up to the desired level with the remaining funds. Most of the major investment institutions are, on the other hand, exempt from tax.