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What is an Institutional Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 November 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Institutional funds are mutual funds that seek to provide the best return for their investors by investing in a number of different securities, thus reducing risk while also improving the potential for a consistent and equitable return. An institutional fund will often be used as part of the investment strategy for a pension or other type of retirement fund. The institutional fund can also be employed as part of the process for funding endowment trusts as well as attracting the attention of other types of institutional investors.

There are a few characteristics that tend to distinguish the institutional fund from other types of mutual funds. One has to do with the high amount of diversity among the investments made by the fund. While all mutual funds attempt to diversify assets in order to provide the best return, an institutional fund will often invest in hundreds or even thousands of different securities, including shares of stock, bond issues, commodities, and other investment options. This approach greatly minimizes risk, since the wide range of investments involved make it very easy to offset one investment that is performing poorly with the superior performance of a different investment. At the same time, this approach helps to keep the administrative costs associated with the fund to a minimum, since very little trading takes place.

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Another common aspect of an institutional fund is that very little trading of investments occurs. Generally, the securities that are acquired by the fund are chosen for their relative stability and their proven track record of generating returns over a number of years. This further adds to the attractiveness of the fund to potential investors, especially those who are looking for long-term growth with their investments, and not quick gains on investments that must be sold before they begin to reverse course and lose money.

In order to attract the right type of investors, an institutional fund normally has high requirements for participation. This includes requiring that each investor have a high minimum amount of cash to invest in the fund. In exchange for meeting these requirements, most funds of this type charge lower fees than those associated with other types of investment funds. The typical institutional fund will seek to attract the interest of managers of various types of retirement plans, administrators of large trusts, particularly endowment trusts, and officers charged with making investments for universities and other types of large institutions.

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