What Is an Institutional Fund?
An institutional fund is available only to large, institutional investors. Institutional funds can invest for a variety of purposes, including educational endowments, nonprofit foundations, and retirement plans. Firms, charities, and governments may invest in institutional funds. Fund managers offer institutional funds with varying market objectives. These funds are used to build comprehensive investment portfolios for institutional clients.
- 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
Investment managers offer institutional funds to their clients in a few different ways. Typically, institutional clients have a board of trustees responsible for managing their portfolio. They can also pick fund managers to invest in institutional funds for them. Institutional clients are often charged with managing assets on behalf of an institution or group of investors. It follows that institutional clients generally have large amounts to invest, usually more than $100,000.
Institutional funds have arisen in order to meet the unique demands and needs of larger institutions, which tend to differ from other types of investors. In the marketplace, investment managers offer funds structured for particular institutional clients. These funds have specific requirements, with the size of the investment being the primary requirement.
Institutions often face more limits than retail investors. Many nonprofits cannot invest in firms that profit from perceived social ills. A religious charity 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 based on the S&P 500.
On the other hand, institutional investors benefit from greater access to capital and longer time horizons. Large amounts of capital often give institutions access to funds at lower fees. These lower fees can be seen as a sort of group discount. Longer time horizons also give institutions more scope to invest in illiquid assets, which often have higher returns. Funds aimed at institutional investors sometimes focus on this advantage.
Types of Institutional Funds
Investment managers offer a few types of fund structures specifically for investment by 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 as one class of their mutual funds. Institutional shares have their own fee structure and investing requirements. Institutional shares usually offer 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. Commingled funds are a type of investment vehicle that uses a pooled investment structure. 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.
All types of 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. Separate account fees may be higher than other institutional fund fees because of the greater customization involved with managing the fund.