What is an Endowment Fund?
Definition: An endowment fund is the money donated by philanthropists to non-profit organizations to facilitate the fulfillment of the objectives of the institutions. Typically, such donations target institutions like universities, hospitals, churches and museums. Depending on the size of the fund, it is intended to meet part or the entire expenditure by the target institution. The institution can invest the capital of the fund and then withdraw the income regularly.
Usually, the donors behind the scheme insist that the principal remains intact but the investment income can go into the organization’s operational expenses. The donors have an overarching role in terms of what happens to the fund. Particularly, the donors determine the structure, utilization and the implementation of the scheme. To this end, the donors have a huge influence when it comes to the determination of the major components of the fund.
Majority of the notable institutions of higher learning are beneficiaries of endowments funds. Each donor that gives the money hopes to meet certain ends. The number of endowment funds set up across the globe is increasing every day as more people turn to philanthropy. However, many people do not understand what these programs are and why they are set up.
Components of an Endowment Fund
The components of a typical endowment fund are three. The first one is the investment policy. Usually, endowment funds are availed such that the recipient organization can invest the principal sum. However, the donor decides the kind of investment policy, whether it is aggressive, passive or otherwise.
Another component of an endowment fund is the withdrawal policy. Simply, the component defines the guidelines that the fund manager must adhere to when withdrawing from the fund. This includes the withdrawal limit per installment, the period between withdrawals and many other relevant guidelines. Nonetheless, the guidelines that the policy sets forth are unique to the needs of the institution as well as the desires of the donor.
Usage policy is the third component. Typically, the donor defines the usage guidelines of an endowment fund. The donors provide the funds with the desire to achieve a certain end. Hence, the usage of the fund must align with the desire of the donor. However, it is common for donors to provide funds without conditions such that it is up to the recipient institution to define the usage policy.
What are the Types of Endowment Funds?
There are three different types of endowment funds:
- Term endowments
- Restricted vs unrestricted endowments
- Quasi-endowment funds
Let’s take a look at each.
Term endowments
Similar to their components, the types of endowment funds largely depend on the wishes of the donor. For example, there are term endowments, which simply means that the donor intends the funds to serve the recipient organization for a pre-determined period. For example, a donor may give out $2 million to a museum with instructions that $1 million should be used only after six months. Therefore, it is up to the fund manager to come up with a schedule of spending the funds within the stipulated period of time.
Restricted vs unrestricted endowments
Secondly, an endowment fund is either restricted or unrestricted. A restricted fund comes with strict guidelines when it comes to the three primary components i.e. the investment policy, the usage policy, and the withdrawal policy. Notably, the donor of a restricted fund expects the fund manager to adhere to the guidelines without question. On the contrary, an unrestricted endowment fund comes with fewer restrictions of any. For example, a donor may gift a certain amount of money to a university and ask the institution to use it in projects of their choice.
Quasi-endowment funds
The third type is the quasi-endowment. The Board of Trustees of the non-profit organization designates this type of endowment. Usually, the fund operates in all intends and purposes like a normal endowment. However, the organization may spend the principal of the quasi-endowment at some point. Interestingly, the Board has the full discretion to expend the fund without any limitations, as is the case with donor-funded endowments.