There are different types of investment clients.
Different individual investors
have different investment goals, risk tolerance and constraints. Some seek growth while others may invest to get regular income.
An institutional investor
's role is to act as highly specialized investors on behalf of others. There are many types of institutional investors.
A pension plan
is a fund that provides retirement income to employees. It is typically considered a long-term investor which has high risk tolerance and low liquidity needs.
- In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. Only the employer's contribution is defined; no promise is made regarding the ultimate benefits paid out to the employee. The employee accepts the investment risk.
- A defined benefit plan defines the benefits that the employee will receive at the time of retirement. That is, the employer assumes the risk of the investment, and is responsible for the payment of the defined benefits without regard to what happens in the trust.
or a foundation
is an investment fund set up by an institution in which regular withdrawals from the invested capital are used for ongoing operations. Endowments and foundations are often used by universities, hospitals and churches. They are funded by donations. A typical investment object is to maintain the real value of the fund while generating income to fund the objectives of the institution.
typically has very short investment horizon and low risk tolerance. Its investments are usually conservative. The investment objective of a bank's excess reserves is to earn a return that is higher than the interest rate it pays on its deposit.
Investments made by insurance companies
are relatively conservative. Although the income needs are typically low, the liquidity needs of such investments are usually high in order for insurance companies to pay claims.
Both the risk tolerance and the return requirement of mutual funds
are predefined for each fund and can vary sharply between funds. They are more specialized than pension funds or insurance companies. Study Session 18 discusses mutual funds in more detail.
A sovereign wealth fund
is a state-owned investment fund. There are two types of funds: saving funds and stabilization funds. Stabilization funds are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy.