What is the Endowment Fund?
An endowment fund is a kind of investment fund that is held by a non-profit organization, and amounts are withdrawn frequently from the fund in order to meet general as well as specific needs. The fund consists of the number of investments made as well as income earned on such investment.
- The endowment funds are funded mainly by way of donations. The funds have specific policies concerning investments, withdrawal as well as usage of the funds. Normally the policies allow that the initial investment, known as the principal, shall remain untouched, and only the investment income can be withdrawn for use in the operations of the non-profit organization.
- In the case of most of the large funds, a part of the principal amount is allowed to be withdrawn after a particular period. In such a case, donations remain invested in the fund for a longer time and hence increase the value of the fund. The funds are mostly managed by portfolio managersPortfolio ManagersA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. .
- The endowment fund is a fund held by non-profit organizationsNon-profit OrganizationsA not-for-profit organization refers to a legal entity that isn't created to generate profits or revenue for its owners but aims at social, educational, religious or public welfare and service. Such an organization is tax-exempted and run through donations or any other income it makes. such as hospitals, schools, and so on.
- It is funded by way of donations. The donations can either be specific or general.
- There are policies regarding the withdrawal of principal amount, usage of funds, and investments in the fund.
- The fund consists of the principal amount as well as the income earned on such principal.
How does it Work?
- These are held by non-profit organizations to meet their day-to-day operations as well as any specific needs, and such funds work as financial support for such organizations. Contributions are made to the fund by way of donations. Such donations thus form part of the fund and are invested.
- The fund generates income, which is used for the operations and objectives of the organization. There exist different policies for subsequent withdrawal from the fund. Some funds may allow the principal amount to be withdrawn after a certain time. On the other hand, some funds may not allow the withdrawal of the principal amount at all. Thus, one needs to have a look at the fund policy to understand the withdrawal terms.
Example of Endowment Fund
One may consider the real-life example of Harvard, the University of Texas, Princeton, and Stanford, which held endowment funds of an amount more than $25 million in the year 2017. The fund was being criticized since, although such huge amounts were lying in the funds, the tuition fees were increasing.
Components of Endowment Fund
#1 – Investment Policy
It contains policies to investments that can be made by a manager and his expected approach in making such investments.
#2 – Withdrawal Policy
This part contains the details as to the amount that is allowed to be withdrawn from the fund and the time interval at which such withdrawals can be made.
#3 – Usage Policy
It provides guidelines for purposes for which the fund may be utilized and also aims to ensure that no deviation is made for such purposes.
Types of Endowment Funds
#1 – Restricted Funds
In such funds, limitations are placed by the donor for the usage of the proceeds of the donation for a specific purpose. Thus, the funds to such donation can be utilized for the purpose specified by the donor only.
#2 – Unrestricted Funds
In these funds, there exists no limitation or restriction for usage of the fund. As a result, the organization is free to utilize the proceeds in any manner as per its policies to meet its objectives.
#3 – Quasi-Endowment Funds
Such funds face restrictions, not from the donors but the governing head of the organization, and are intended to generate income for a long time. There exist restrictions regarding the utilization of principal as well as income portions of the fund, and the same can be accessed only as per the instructions of the governing body.
#4 – Term Endowment Funds
These funds contain a condition that the principal amount or the part of it can be used only after the expiry of a certain time or the happening of a certain event, as decided by the donor. After the time limitation imposed by the donor are over, the organization is free to utilize the fund amounts as per its discretion.
- The fund helps the organization with the attainment of its objectives by acting as financial support.
- The fund is managed by professional managers who undertake due care in the management of the fund.
- It acts as a regular source of income for the organization.
- The fund provides additional support to the annual fund of the organization.
- The proceeds of the funds can be utilized by the organization for various programs.
- The contributions made by way of specific donations can be used for limited purposes only.
- There may exist restrictions for the withdrawal of the funds, which may sometimes hamper the operations.
These are held by non-profit organizations, and there may be different policies concerning each such fund. However, each such fund contributes to the growth of the organization for which they are created.
This has been a guide to What is Endowment Fund & it’s Meaning. Here w discuss the endowment fund example, features, and how it works along with components, types, advantages, and disadvantages. You can learn more about from the following articles –