What Are Endowment Funds And Can You Invest In Them

Endowments are monetary gifts given to nonprofit organizations such as schools, churches, museums, and other institutions that rely heavily on donations. These gifts are typically given by trusts, charitable organizations, or individual wealthy donors. When an endowment is gifted, it is sometimes given with stipulations for how it is to be used — for example, when gifting an endowment to a school, the donor could require the endowment to be used to fund a music program or a scholarship program, or if being gifted to a retirement facility, a donor could require the funds to be used to reduce the monthly fees for low-income individuals.

The endowments, which are either managed by an endowment committee at the receiving organization or by an outside investment firm, are then invested so they grow over time. They serve as a cushion for those organizations, with the principal donation being invested to further grow the fund, and therefore the cushion, for the organization which can then use those earnings to directly support operations. There are different types of endowment funds that are guided by different terms of use regarding management, withdrawals, and the way the funds are invested.

While a variety of organizations hold endowment funds, they are most commonly associated with universities. According to the National Center for Education Statistics, the market value for the endowments of the nation's universities totaled $927,174,812 at the end of 2021. It is important to note that this number grew from $691,144,829 in January of that year, marking an increase of 34% in just one year, evidence that the investment power of these funds is quite substantial.

While endowments aren't the type of funds individuals can invest in hoping for a positive return, they often come up when someone has an interest in donating money to a particular organization. Donating to them, however, has its own perks. To begin with, by making such a charitable donation, you are doing a good deed by supporting an organization that provides for the community or a certain segment of the community, such as a cultural organization that helps to preserve cultural heritage or a scholastic organization that helps educate the young minds that will shape our future.

From a financial standpoint, however, donating to an endowment has a much different impact. By donating to a nonprofit organization's endowment fund you are also helping yourself out financially since charitable donations are one of the most important tax breaks you should know about (and this trick for using charitable donations to reduce your taxes on your social security income is genius).

Many organizations and institutions that have endowment funds make donating to them easy (often you can simply go to the organization's website to make your donation directly) and allow you to decide how your donation is to be used — either by stipulating a specific use or by allowing the organization to determine where the funds are most needed. In some cases, like with Harvard University, which holds what is currently the largest endowment fund for a university, donors can make specific determinations about the individual schools and research departments within the University for both current gifts and future giving options, as well as use creative donation tools like using IRA or stock gifts.

Endowment funds are each managed a little bit differently as determined by the individual organization's endowment committee or the firms they hire to manage their endowment investments. While these funds are tax exempt (one of the perks of operating as a nonprofit), this benefit is not available for individual investment strategies, you can still take advantage of the endowment fund investment style to boost your own income.

The key to managing your own investment portfolio like an endowment fund is to understand why endowment funds are so successful. These funds typically work with very large sums of principal, which allows them access to higher returns. Additionally, they are often managed with the oversight of a dedicated committee of investment professionals that benefit from the extensive social networks afforded to institutions like churches, museums, and universities. For these reasons, individual investors cannot expect to duplicate the results of an endowment fund with their individual investments, but by working with a financial advisor, particularly a fiduciary (individuals or organizations, as defined by Investopedia, who act on behalf of others and are required to put clients' interests ahead of their own), you can benefit from the outside perspective of an investment professional.

It is also important to note that endowment funds tend to use a variety of investment options. This strategy not only helps to mitigate losses during times of market instability but also allows for creative investing that could generate impressive returns. In addition to standard investment strategies like stocks, bonds, and annuities, other options could include real estate, commodities, and even investing in art and antiques. By having a diversified portfolio and the support of a professional, you can take an endowment approach to your own financial future.