Types of Institutional Funds
Institutional investors are a company or organizational investors that invest money on behalf of other people. These include mutual funds, pensions, and insurance companies and they usually buy and sell substantially large blocks of bonds, stocks., and securities. Institutional investors are superior in comparison to retail investors and are subject to fewer regulations.
What are Institutional Funds?
A collective investment vehicle for large institutional Investors is Institutional Funds. They aid in building comprehensive portfolios for their clients by offering varying market objectives while investing for multiple purposes such as educational endowments, nonprofit foundations, and retirement plans. Institutions such as governments, charities, and large companies are known to invest in institutional funds.
Institutional funds are investment funds with assets exclusively held by institutional investors. The fundamental reason for their existence is to meet the investment needs and requirements of large institutions that differ from those of smaller-scale investors. Institutional fund offerings include institutional shares of a mutual fund, commingled institutional funds, and other separate institutional accounts.
Institutional funds meet the unique investing needs of larger institutions that generally have a lot more money to invest, than typical individual investors. With greater access to capital, they can accommodate lower billing charges for their institutional clients. Institutional funds have characteristically longer time horizons providing more scope for investments in illiquid assets and a chance to generate higher returns. This is a notable advantage offered by institutional funds to their institutional investors.
Types of Institutional Funds
Institutional funds are offered by Investment managers with varying structures to meet the different needs of their institutional clients. These funds form a part of a pooled fund, managed by fund managers for efficient operations and transaction costs. The following comprise the various types of Institutional funds:
Institutional Mutual Fund Share Classes
Mutual funds have a share class for institutional investors, defined by their guidelines of investing requirements and fee structure. Institutional shares are associated with the lowest expense ratio among all other share classes in the mutual fund. The minimum investment requirement is usually around US$100,000 and can go higher.
Institutional Commingled Funds
Investment managers also create institutional commingled funds, outside of mutual fund offerings. Similar to a mutual fund, they are a type of pooled fund. The difference between the two is, that a commingled fund is not publicly listed or available to individual retail investors.
A commingled fund comprises several asset accounts blended to reduce the costs associated with separate management of the comprising constituents. These funds are used in retirement plans, pension funds, insurance policies along with other institutional accounts. A key point of differentiation is also in terms of SEC regulation, as commingled funds are typically out of the purview of SEC regulations. Commingled fund investments benefit greatly from economies of scale, allowing for lower trading costs per dollar of investment and diversification, lowering portfolio risk, similar to mutual funds.
Separate Accounts
A separate account is a portfolio, managed by a professional investment firm, usually RIA- a registered investment advisor on behalf of the owning investor. These are also referred to as separately managed accounts–SMA or individually managed accounts. Investment managers also offer separate account services for institutional investors. In events, where institutional investors are keen on the management of assets outside of established investment funds provided by the firm, they use separate accounts.
Investment managers may also be responsible for asset management for an institutional investor in a broadly diversified separate account. They are designed to have their fee structure, as determined by the investment managers. These charges may be higher than fee structures for other institutional funds, due to the higher degree of customization that is involved in their management.