Mutual funds are an attractive investment option to individual investors who can benefit from the fund's diversity and the experience of a professional fund manager. Individual investors aren't the only ones who invest in mutual funds, however. Businesses and other entities often need investment options and advice for investing pension funds, endowments and other large blocks of cash. For businesses, there are institutional mutual funds.
How They Work
Institutional mutual funds work the same way as a retail mutual fund. In fact, companies that offer institutional mutual funds tend to have retail and institutional versions of the same funds. A large block of money is invested into hundreds of securities under the direction of a mutual fund manager. The manager then buys and sells shares of securities, using the investment dollars, in accordance with the goals of that particular mutual fund.
Diversity
Institutional mutual funds offer diversity, which is not a problem achieving with a large amount of money. Many times they can invest in more securities than even retail mutual funds invest in. You can also choose to deal with a company that offers multiple institutional mutual funds. If you do, the company usually allows you to move your funds between its various institutional mutual funds easily, offering you even more diversity.
Lower Operating Costs
An institutional mutual fund also has a lower operating cost than the same fund's retail version. This can be achieved because institutional mutual funds don't tend to trade securities as often as retail mutual funds. Because a mutual fund's operating costs are subtracted from its performance rate, this means that it is easier for an institutional mutual fund to post a positive return compared to its retail version.
Higher Minimum Investment
Institutional mutual funds have higher minimum investments. The individual investors in an institutional mutual fund are typically investing at least $1 million. Not only is a higher amount required to establish the account, but subsequent purchases of shares also require higher amounts than retail funds.
Choice
While there are many institutional mutual funds available with a variety of investing objectives, there aren't nearly as many as there are retail funds. You will also institutional mutual funds available in whatever type of security you want -- stock, bond or money market.
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