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An endowment fund is money set aside to earn revenue to fund some type of charitable activity. In this sense, it is like a trust fund, but the beneficiary is a charitable organization instead of a person. The types of charitable organizations that have endowment funds include churches, universities, hospitals and other nonprofit organizations. Often, wealthy donors set up endowment funds as a tax-planning tool to reduce income and/or estate taxes.

Most endowment funds are created with cash, marketable securities and other assets that generate investment income. It is most often the investment income that is used to fund the charitable activity, not the sale of the actual investments themselves. 

When a charitable organization has an endowment fund, the organization’s managers have a fiduciary duty to diversify the fund’s assets using modern portfolio theory. This is the best way to insure the assets are invested safely and have the greatest potential to grow. 

Some endowment funds have a very specific purpose. Others are more general. For instance, an endowment fund that is for a specific professorship chair at a university may only be used to compensate the professor who occupies that position. But an endowment fund for a child advocacy charity’s general fund might be used any way the endowment fund’s board approves, so long as it helps the child advocacy charity’s mission. 

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