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.
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.
FAQs
An institutional fund is a type of collective investment option that is available to a variety of institutional investors. The list includes high-net-worth individuals, governments, charities, companies, or entities such as hedge funds, endowments, mutual funds, pension funds, etc.
What are the different types of institutional accounts? ›
Investment accounts for institutional clients include the following:
- Employee Benefit Plans – Learn more.
- Charitable Accounts.
- Endowment Accounts.
- Foundation Accounts.
- Corporate Accounts. Cash Management Services. Diversified Portfolio Management Services.
Institutional funds are built to meet the unique demands and requirements of larger institutions. These funds typically entail a large minimum investment. Institutional investors, by definition, have larger capital at their behest than the average individual investor.
What are the different types of institutional investors? ›
Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies.
What are institutional money funds? ›
Institutional prime and institutional municipal money market mutual funds are funds that do not qualify as retail funds—i.e., they may be held by institutional investors.
What are the 9 major types of financial institutions? ›
The 9 types of financial institutions are:
- Central Banks.
- Retail and Commercial Banks.
- Internet Banks.
- Credit Unions.
- Savings and Loan Associations.
- Investment Banks and Companies.
- Brokerage Firms.
- Insurance Companies.
The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.
How do institutional funds work? ›
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.
What defines institutional money? ›
Meaning of institutional fund in English
an investment fund (= money invested in shares, bonds, etc.) that can only be used by large financial organizations: For the larger institutional fund manager, investing in small-to-midsized stocks can be uneconomical.
What are the objectives of institutional funds? ›
Fund managers professionally manage such investment portfolios to serve varied investor objectives like retirement plans, educational endowments, wealth creation, etc. Since large institutions have varied and distinct investment objectives, these funds are specifically designed to serve such needs.
Institutional investors operate with large amounts of capital, allowing them to make significant investments and employ sophisticated strategies. Retail investors typically have smaller investment amounts, relying on personal research and financial advice.
What are the different types of institutional account holders? ›
Institutional Holder . Any insurance company, bank, savings and loan association, trust company, investment company, charitable foundation, employee benefit plan (as defined in ERISA) or other institutional investor or financial institution.
What is an example of an institutional? ›
Institutional means relating to a large organization, such as a university, bank, or church.
What is institutional funding? ›
An institutional fund is a type of collective investment option that is available to a variety of institutional investors. The list includes high-net-worth individuals, governments, charities, companies, or entities such as hedge funds, endowments, mutual funds, pension funds, etc.
What is an institutional fund vs retail fund? ›
While institutional investors are the giants of the financial industry, tasked with investing other people's money, retail investors are individuals using their own money to invest for the sake of their own personal financial goals. The fast-paced financial industry sees trillions of dollars move around the globe.
What is the difference between a mutual fund and an institutional fund? ›
Mutual funds are primarily retail products, which gather assets from vast numbers of individuals who have limited balances to invest. Institutional accounts gather assets from a limited number of clients who have millions or even billions of dollars to invest.
What is an example of an institutional account? ›
Institutional Account means the account of: (1) a bank, savings and loan association, insurance company or registered investment company; (2) an investment adviser registered either with the SEC under section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing ...
What are the four different institutional arrangements? ›
The institutional arrangements for implementation are formed by several local social actors who constitute social actors, and are categorized into the following sectors: 1) the public sector; 2) the private sector; 3) the academic/educational sector; and 4) civil society.
What is the institution account? ›
An account that's opened by or for an institution (like an insurance company or brokerage) for the benefit of banks, mutual funds, or others. These accounts usually have lower costs and commissions and let money flow between institutions more easily.
