At the crossroads of investment strategy, anchor investors and traditional investors represent two distinct approaches—the former providing foundational strength to the business and the latter navigating market dynamics. Understanding their roles is important.
In the world of finance, the terms “anchor investors” and “traditional investors” often pop up, but they serve distinct roles in the investment ecosystem. Imagine anchor investors as the bedrock of a financial offering, providing a stable foundation with their substantial, early commitments, while traditional investors follow in their wake, often reacting to market conditions and trends. This article dives deep into the nuances of these two types of investors, exploring how their strategies and impacts diverge and what that means for the future of investment landscapes.
Understanding Traditional Investors and Anchor Investors
Traditional investments are the most well-established instruments and are deemed safer than other alternative investment options.
Traditional investors encompass both retail and institutional investors. Retail investors, also known as individual investors, typically purchase securities for themselves. Whereas, institutional investors include big institutions like mutual funds, pension funds, banks, and insurance companies that invest on behalf of their clients or members and often execute transactions in large volumes. Institutional investors buy and sell in bulk, usually on behalf of other investors, while retail investors tend to buy in lesser quantities.
They do not generate extraordinarily high returns, but investments in G-sec and fixed deposit instruments are considered low-risk and highly safe.
Let’s look at the types of instruments a traditional investor invests in:
- Stocks: These are securities representing the percentage ownership of an investor in a company. Traditional investors invest in stocks of public companies. It is the most direct method of participating in a business’s success.
Various investment funds allow investors to diversify their stock portfolio based on their specific needs and risk appetite.
Investors have long profited from funds dealing in public equities. For example, large-cap equity funds that invest in more stable large market-cap companies have delivered 5-year and 10-year annualized returns of 15.03% and 14.36% respectively, which is considered a good return in public markets.
- Bonds: Traditional investors invest in debt instruments issued by governments and corporations looking to raise capital. The government is the largest borrower in the debt markets and the rate at which they offer bonds is considered the risk-free return rate and is very low, corporate bonds usually have to offer higher return rates to compensate for the extra risk an investor takes by investing in a business.
- Cash and cash equivalents: Cash equivalents are issued by financial institutions in the form of savings accounts, GICs, money market instruments like commercial paper, and repurchase agreements. They provide a great way for traditional investors to invest excess cash. These are the most liquid security and reliability of cash.
Anchor Investments
These are only related to investments made by anchor investors at the time of the IPO. The funds companies raise through anchor investments are crucial for the success and failure of a company’s public debut. They are allotted shares one day before the actual IPO listing and constitute 60% of shares allotted to qualified institutional buyers (QIB).
Anchor investors include HNIs and entities like mutual funds, pension funds, alternative investment funds, foreign portfolio investors, and sovereign wealth management platforms.
The minimum investment an anchor investor can make is 10 Cr in a mainboard IPO and 1 Cr in an SME IPO. Below are the returns generated by the five largest anchor investors from FY2007-till date.
Conclusion
Anchor investors and traditional investors each have unique roles in the financial world. Anchor investors provide critical early-stage funding for IPOs, ensuring stability, while traditional investors engage with established securities and navigate market dynamics. Understanding these distinctions helps clarify how each type contributes to market stability and growth.
