DEFINITION of 'Restricted Fund'
A reserve of money that can only be used for specific purposes. Restricted funds provide reassurance to donors that their contributions will be used in a manner they have chosen. When a donor gives money to a nonprofit organization, he or she may specify whether the gift is unrestricted and can be used for any purpose the organization sees fit, temporarily restricted to be used for a certain purpose, or permanently restricted so that the donation acts as principal on which interest can be earned (and only the interest is to be spent).
BREAKING DOWN 'Restricted Fund'
Most often endowments are considered restricted funds.Their principal usually cannot be spent at all, and only a specified percent of the interest they earn can be spent per year. Furthermore, there are restrictions on how the interest can be spent - it may be used only to fund scholarships and professorships, for example.