Funding Agreement
What Is a Funding Agreement?
A funding agreement is a type of investment that a few institutional investors use in view of the instrument's generally safe, fixed-income qualities. The term generally alludes to an agreement between two parties, with an issuer offering the investor a return on a lump sum investment. Generally, two parties might go into a legally binding funding agreement, and the terms will normally frame the scheduled utilization of capital as well as the expected rate of return over the long haul to the investor.
Grasping Funding Agreements
A funding agreement product requires a lump sum investment paid to the seller, who then, at that point, furnishes the buyer with a fixed rate of return throughout a predefined time span, frequently with the return in view of LIBOR, which has turned into the most well known benchmark in the world for short-term interest rates.
Funding agreement products are like capital guarantee funds or guaranteed investment contracts, as both of these instruments likewise guarantee a fixed rate of return with practically no risk to principal. At the end of the day, guarantee funds can normally be invested in without risk of loss and are generally viewed as risk-free. In any case, as certificates of deposit or annuities, funding agreements commonly offer just humble rates of return.
Funding agreements and comparative types of investments frequently have liquidity limitations and require advance notice — from either the investor or the issue — for early redemption or termination of the agreement. Subsequently, the agreements are frequently targeted for high net worth and institutional investors with substantial capital for making long-term investments. Mutual funds and pension plans frequently buy funding agreements due to the safety and consistency that they offer.
Funding agreement products can be offered all around the world and by many types of issuers. They commonly don't need registration and frequently have a higher rate of return than money market funds. A few products might be tied to put options permitting an investor to terminate the contract after a predefined period of time. As one would expect, funding agreements are generally famous with those wishing to utilize the products for capital preservation, as opposed to growth, in an investment portfolio.
Illustration of a Funding Agreement
Mutual of Omaha gives one platform to funding agreement products accessible to institutional investors. These funding agreements are marketed as conservative interest-paying products with consistent income payouts, and are offered for fixed terms with fixed or variable interest. The funds that are deposited are held as part of the United of Omaha Life Insurance Company General Asset Account.
After the lump-sum investment is made, the Mutual of Omaha funding agreement takes into consideration termination and redemption under any condition by either the issuer or the investor, yet contract terms expect that 30 to 90 days notice be given prior to the last day of the interest rate period by either the issuer or the investor.
Highlights
- While the investor gives a lump sum of money, the issuer guarantees a fixed rate of return throughout a time span.
- Portfolios that are centered around capital preservation, instead of growth, are bound to go into funding agreements.
- Due to its generally safe nature, the return to the investor from a funding agreement is normally unobtrusive.
- A funding agreement is an agreement between an issuer and an investor.
- Funding agreements are famous with high-net-worth and institutional investors due to their okay, fixed-income nature.
