What is an Endowment Fund
An endowment fund is a unique account created to generate funds for a specific task over a long period of time. It is mainly created to use money on a continuous basis over a long period of time. One of the advantages of creating an endowment fund is that the principal amount is not spent at any given point of time. This leads to continuous financial support for the institution for carrying out a specific task. The principal amount is invested in such a manner that it yields steady returns.
Endowment funds are generally created by educational institutions, charitable trusts, religious organizations, and research institutes. Educational institutes create endowment fund to support scholarships and to help needy students for completing their studies. Research institutes create endowment funds to ensure that financial aid is available to carry out different researches, tasks such as buying tools, and to invest on human resource.
Charitable trusts create endowment funds to generate funds for undertaking different activities the trust is involved in. For example, they need such funds to conduct rehabilitation camps for the under privileged sections of the society, to participate in seminars and conferences to raise an awareness, and to carry out the administrative tasks. Religious organizations having presence in several countries create endowment fund to help the needy people attend the seminars and gatherings conducted for the upliftment of human beings.
Some endowment funds are created by the terms outlined by the donors. In such funds, donors might clearly state that part of the money donated to the organization can be spend currently while the remainder of the money needs to be spend in small portions over the period of 25 years for the specified task. Such endowments are generally created when institutions or organizations request donors for endowment gifts to support different functions of the organization.
Board of directors or people governing the functioning of the institutions should take special care while investing the principal amount of the endowment fund in the market. The board should take into considerations different factors such as the economic conditions, rate of interest, financial performance of the companies, and term of deposit before investing the amount. This will ensure that the return on investment is steady and the principal amount is not at the risk. Thus, organizations can perform their task without worrying about the financial aspect.
The governing body of the institution needs to decide how much amount would be spent annually from the total available funds. In the case of donors specifying the fund limits, the board should ensure that the funds are spent accordingly. The governing body of the institution is also responsible for successful administration of the endowment fund along with the financial investment of it. The board should take all decisions that are in the best interest of the institution’s activities.