Endowment Fund

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DEFINITION of 'Endowment Fund'

An investment fund set up by an institution in which regular withdrawals from the invested capital are used for ongoing operations or other specified purposes. Endowment funds are often used by nonprofits, universities, hospitals and churches. They are funded by donations, which are tax deductible for donors.

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BREAKING DOWN 'Endowment Fund'

There are three main components to the typical endowment fund:

1. Investment Policy: This policy dictates the types of investments the manager can make and how aggressive he or she can be in meeting return targets.
2. Withdrawal Policy: This policy determines the amount that the institution can take from the endowment fund at each period and is usually based on the institution's needs as well as the amount remaining in the fund.
3. Fund Usage Policy: This policy ensures that the money from the endowment fund is being used properly and for the purposes set out by the fund.

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