It is a collective investment option that is only available exclusively to large-scale institutional investors. These large-scale institutes include companies, governments, and charities.
These funds enable clients to build a comprehensive portfolio and can be used to invest in nonprofit foundations, educational funding, and retirement plans.
These funds are only available to large institutional investors because their requirements differ from other types of investors. Institutional funds require a significant minimum investment, which can be fulfilled only by large investors because they have access to more assets.
Institutional investors are advantageous when it comes to time horizon; they have a longer time horizon making it possible to invest in illiquid assets, which generally generates high returns.
But when it comes to moral grounds, institutions may face more limits than retail investors do. Investors avoid investing in companies whose products are against their moral, social, or religious values. For this purpose, institutional clients prefer to have a board of trustees managing their portfolios and picking fund managers to invest on their behalf.
Types of institutional funds
As per the needs of institutional clients, some types of funds structures are offered by investment managers. Some of them are:
Institutional mutual fund share classes
These institutional shares are offered by mutual funds having their fee structure and investment requisites. Among mutual funds, these shares have the lowest expense ratios as compared to all other share classes. Around $100,000 is the minimum investment, but it can be increased.
Institutional commingled funds
These funds requirements regarding the fund and investing are alike as institutional mutual fund share classes. They offer low expense ratios because of the economics of scale from more considerable investors, and they also have their fee structure.
An option for separate account management is also made available for institutional investors by investment managers. These are generally obtained when an institutional client wants to manage assets outside of the established investment funds of the firm.
In some instances, investment managers are responsible for supervising all the institutional client’s assets with separate accounts that are primarily diversified. Investment managers determine the fee structure of the separate account investors, and they can be higher than other institutional fund fees because of the unique customization required.
Ways to access Institutional Funds
Institutional funds are those designed for institutional funds, such as pension funds, which usually have a meager expense ratio, making them attractive investments. Also, these funds have breathtakingly high initial purchase requirements, qualifying as an institutional fund. Some of the common ways to access these institutional funds are:
Employer-sponsored retirement account
Some of the employer-sponsored retirement plans, such as the 401(k)s, have access to the institutional funds, especially when the employer is a large one. The total of all the investments by employees in the 401(k) plan is enough to meet the high initial purchase requirements.
If, in case, you do not have institutional funds in your 401(k), you need to ask your plan administrator if it is possible to substitute an institutional version of the existing funds. If your company’s plan is large enough to qualify, then there is no such reason why you shouldn’t be able to enjoy those ultra-low expense ratios.
College Savings Plan
State-sponsored college savings plans sometimes offer institutional funds for their investors. It is also known as the 529 plan. If you choose to invest in this 529 plan, then narrowing your search to the plans that offer these types of institutional funds can help save you a lot of money in the form of fees. It is also important to note that some 529 plans are required by either the purchaser or the beneficiary to be a resident of the plans sponsoring state. If, in case, you are already a part of the 529 plan, then you need to check its investment options to see if there is an institutional fund that can be switched over to.
Still, they also help eliminate fees associated with the standard funds. If you buy your investments from a financial advisor, you would have access to advisor class funds as they aren’t as cheap as institutional class funds. On the other hand, the advisor class funds are cheap as the fund manager assumes that the advisor will charge high fees for the access. So, before diving into such a fund, you need to question your advisor regarding the fees you will pay for the privilege.
Another better option is to choose a financial advisor with a large enough clientele base to bundle clients’ funds to hit a minimum purchase requirement for genuine institutional funds. If you can find a financial advisor who is willing to do this, it is still essential to understand the fees you will pay to ensure that it is a better deal than just buying regular funds directly.
Discount brokers do not usually have to give retail investors direct access to the institutional funds. Still, they offer special funds just for clients who have extremely low expense ratios and reasonable minimum initial purchase requirements.
It is essential to dig into the prospectus and verify that you are not paying another type of fee to get the low expense ratio with the advisor class. These types of custom brokerage funds might not be as good as institutional funds, but they may be the next best thing available.
The Final Word
It’s essential to keep in mind that just because you have access to one particular institutional fund, it doesn’t mean that you could snap it up. Any fund with poor returns or that doesn’t fit the investing goals is a poor choice, no matter how cheap it might be. If you cannot find a tremendous institutional fund, pick up a tremendous standard fund.