What is an Endowment Fund?
Definition: An endowment fund is an investment held by a nonprofit. The money that the fund generates is used to fulfill the objectives of the institution. Typically, hospitals, universities, museums, and churches meet a part or all of their expenses from the money that their endowment funds generate.
What does Endowment Fund mean?
In most instances, the principal amount held in the endowment fund cannot be utilized. Only the returns that the fund generates are available for use. This ensures the long-term survival of the institution and its ability to continue to work towards meeting its stated goals.
When an endowment fund is established, the rules governing the manner in which its capital will be invested are laid down. The rules will also specify the fund’s withdrawal policy. Finally, every endowment fund has a usage policy. How will the money that the fund generates be used and what is the manner in which it will be spent?
An endowment fund may comprise individual donations made by separate donors. Each donor may stipulate that the money that is being provided should be used only for a particular purpose. For example, a university’s endowment fund may be the aggregation of thousands of individual donations.
Example of an Endowment Fund
Many American universities have large endowment funds. Here’s a listing of the top six:
Each university tries to ensure that its endowment fund earns the maximum possible rate of return. Of course, it is equally important to preserve the fund’s capital and to limit its exposure to risk.
David F. Swensen, who runs the Yale University’s $25.41 billion fund, has managed to meet both these objectives. He took over the school’s $1 billion endowment in 1985. Over the last 20 years, the fund has earned an average return of over 12% per year, which is a remarkable achievement.
The money in an endowment fund is contributed by donors and is used to generate the returns that are needed to meet the objectives of the organization. The rules governing the fund specify the manner in which the principal will be invested and the usage of the returns.