Institutional Fund

Definition

The term institutional fund refers to a mutual fund that caters to the needs of high net worth individuals, pension funds, and endowments.  The characteristics of institutional funds include both lower operating costs and high minimum investments.

Explanation

Mutual funds looking to attract investments from pension funds, endowments, and high net worth individuals oftentimes operate as institutional funds.  These are mutual funds that distinguish themselves in the following manner:

  • Low Risk:  by holding an extremely diverse portfolio of securities, these funds can lower the overall risk of loss to the investor.
  • Low Turnover and Management Fees:  since the number of securities in the portfolio is relatively large, turnover is relatively low.  Consequently, the fees associated with operating these funds are also relatively low.
  • High Minimum Investments: because these funds are looking to attract investments of pension funds, endowments, and high net worth individuals, the minimum investment may be $1 million or more.

Note: Institutional funds can include mutual funds as well as hedge and private equity.  However, if the fund is established as an institutional fund, the prospectus must indicate this feature.

Related Terms

retail investor, retail fund, institutional investor