Question

Explain the key characteristics of insurance companies, pension funds, mutual funds and hedge funds.

Answer 1

Insurance companies: They provide protection from financial loss due to death, medical issues, accident, etc. They charge a premium and pool all these from the insurance holders and invest in low risk instruments. The returns can be used to payoff in case of requirement or financial loss of customer.

Pension Funds: These investment are for long term and risk involved is lower. These are for the benefits of the retiree who want to invest in low risk securities.Both private and company pension funds are available,

Mutual Funds: Mutual funds pool investments to invest in stocks, bonds and other securities. The mutual funds can be index funds which replicate risk and return profile of the market index. Here the investors are retail or mutual fund houses. They need to be registered with the SEC.

Hedge funds pool funds from Wealthy individual with the purpose of investing in simple and complex instruments like derivative markets, shares , bonds, currency, etc. It tries to minimise risk by allocating funds in different instruments. They do not have to register under SEC. The risk appetite is very high in this case.

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