What is the Endowment Fund?

Explanation

  • 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that the initial investment, known as the principal, shall remain untouched, and only the investment income can be withdrawn for use in the operations of the non-profit organization.In the case of most large funds, a part of the principal amount is allowed to be withdrawn after a particular period.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. Portfolio managers mostly manage portfolio managersPortfolio ManagersA portfolio manager is a financial market expert who strategically designs investment portfolios.read more.

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Features

  • The endowment fund is 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.read more such as hospitals, schools, etc.It is funded by way of donations. The donations can either be specific or general.There are policies regarding the withdrawal of the principal amount, usage of funds, and investments in the fund.The fund consists of the principal amount and the income earned on such principal.

How does it Work?

  • Contributions are made to the fund by way of donations. Non-profit organizations hold these to meet their day-to-day operations and specific needs, and such funds work as financial support for such organizations. 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 Some funds may allow the principal amount to be withdrawn after a certain time.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 must 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 more than $25 million in 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 for investments that can be made by a manager and his expected approach to making such investments.

#2 – Withdrawal Policy

This part contains details on the amount 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 the fund’s use and 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 for 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 per its policies to meet its objectives.

#3 – Quasi-Endowment Funds

Such funds face restrictions, not from the donors but from the governing head of the organization, and are intended to generate income for a long time. There exist restrictions regarding the utilization of principal and 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 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 is over, the organization is free to utilize the fund amounts at its discretion.

Advantages

  • The fund helps the organization attain 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 organization can utilize the proceeds of the funds for various programs.

Disadvantages

  • The contributions made through specific donations can be used for limited purposes only.There may exist restrictions for the withdrawal of the funds, which may sometimes hamper operations.

Conclusion

Non-profit organizations hold these, and there may be different policies concerning each such fund. However, each such fund contributes to the organization’s growth for which they are created.

This has been a guide to What an endowment fund is & its Meaning. Here we discuss the endowment fund example, features, and how it works, along with components, types, advantages, and disadvantages. You can learn more about it from the following articles –

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