What Is an Institutional Fund?

An institutional fund is a collective investment vehicle available only to large institutional investors. These funds build comprehensive portfolios for their clients, offer varying market objectives, and can invest for a variety of purposes, including educational endowments, nonprofit foundations, and retirement plans. The types of institutions that invest in institutional funds include companies, charities, and governments.

Key Takeaways

  • An institutional fund is an investment fund with assets held exclusively by institutional investors.
  • Institutional funds exist because large institutions have different needs than smaller investors.
  • Institutional fund offerings can include institutional shares of a mutual fund, commingled institutional funds, and separate institutional accounts.

Understanding Institutional Funds

Institutional funds have arisen to meet the unique demands and needs of larger institutions, which tend to differ from other types of investors. These funds have specific requirements, including large minimum investments.

Institutional clients generally have lots more money to invest than the average investor. This greater access to capital, among other things, can result in them being billed less. Institutional investors also tend to have longer time horizons, providing more scope to invest in illiquid assets that can generate higher returns. Funds aimed at institutional investors sometimes focus on this advantage.

Institutions often face more limits than retail investors, too. Many nonprofits cannot invest in companies that profit from perceived social ills. A religious charity, for example, might need to avoid investing in alcohol, while an environmental group might want to stay out of oil production. Such specific requirements rule out investing in an index fund tracking the S&P 500 Index.

Institutional clients often have a board of trustees responsible for managing their portfolio and can pick fund managers to invest for them.

Types of Institutional Funds

Investment managers offer a few types of fund structures specifically for institutional clients. These funds are usually part of a pooled fund managed comprehensively for efficient operations and transactional costs. Institutional fund offerings can include the following:

Institutional Mutual Fund Share Classes

Mutual funds offer institutional shares. These shares have their own investing requirements and fee structure—institutional shares usually carry the lowest expense ratios of all the share classes in a mutual fund. The minimum investment is generally around $100,000, although it can be much higher.

Institutional Commingled Funds

Outside of mutual fund offerings, an investment manager may also create institutional commingled funds. Institutional commingled funds will have similar investing and fund requirements as institutional mutual fund share classes. They also have their own fee structure and can offer low expense ratios due to economies of scale from more substantial investments.

Separate Accounts

Investment managers also offer separate account management for institutional investors. Separate accounts are most often used when an institutional client seeks to manage assets outside of established investment funds provided by the firm.

In some cases, investment managers may be responsible for managing all the assets for an institutional client in a broadly diversified separate account. Separate accounts will have their own fee structures determined by the investment manager, and these charges may be higher than other institutional fund fees because of the greater customization involved with managing the fund.