Institutional Mutual Funds

In response to a comment today I would like to give a quick summary of Institutional Mutual funds and how they differ from “investor”, “retail” or “open” mutual funds.   What we will see is that the differences are quite small.  But, the differences instead highlight that the two types of funds are intended for different investors instead of a real difference in a fund.

For those who have not heard of institutional funds, lets take the following example, two investors.  One investor (investor A) is very wealthy and has 1,000,000 dollars to invest.  The second investor (investor B) is solidly in the middle class, and would like to invest 2,000 dollars.  As we have talked about before, mutual funds have an annual expense amount (fees that are paid to management company).  If both investors paid a 1% fee, Investor A would pay 10,000 dollars, while investor B would pay 20 dollars.  From a purely practical perspective, the management company has about the same overhead and administrative cost for both the investors, so investor A is paying a lot for the same service that investor B is paying 20 dollars.  So, instead, investor A would rather pay less, and probably shop around to find a better deal.  Now switching sides, a fund management company would rather have one person invest one million than 50,000 people invest 2,000.  So you give the big investor a little bit of a break (they are  still paying a lot if you charge them 0.8% instead of 1%), and you also encourage other big investors to invest with you.

These are the two main differences.  Institutional funds have higher minimum investment amounts (over 10,000 or 100,000), and slightly lower fees, while retail accounts have lower minimum investments (2,000 or less) and slightly higher fees.  The funds are invested in the same stock/ bonds, so there is no difference.

That said, many of you may have institutional funds and don’t even know it.  Many employer 401k plans utilize institutional funds (Each month they combine all the employees amounts and invest one large lump sum into the institutional fund). So be thankful that you are saving money on your fund fees.