What Are Institutional Shares?
Institutional shares are a class of mutual fund shares available for institutional investors. Institutional mutual fund share classes typically have the lowest expense ratios among all of a mutual fund’s share classes. They usually require a minimum investment of approximately $200,000 and may require other specifications for investment.
Key Takeaways
- Mutual funds offer various classes of shares, with institutional shares being reserved for institutional investors and typically having the lowest expense ratios.
- Institutional shares have their own fee structuring and investing specifications, compared to retail shares.
- The minimum investment for institutional shares is generally $200,000.
- Institutional investors include investment managers of retirement benefit plans, endowments, foundations, and institutional investment funds, among others.
- Vanguard’s Admiral Shares, which have minimum investment requirements for certain funds, is an example of institutional shares, having average expense ratios of 0.10%.
How Institutional Shares Work
Institutional share classes are one of many share classes offered in a managed mutual fund offering. Investment companies offer multiple share classes of a fund, giving investors the option to choose the share class that best fits their investment interests.
Retail share classes can include Class A, B, C, and R. Each retail share class has different fees associated with it but all of the share classes purchased are pooled into one fund managed by the designated portfolio manager. Investment companies use commingled fund structures to manage their fund offerings to facilitate pooled fund investing from all share classes.
In addition to the retail share offerings, investment companies also offer institutional shares of a mutual fund. Institutional shares have their own fee structuring and investing specifications.
Institutional shares generally have the lowest expense ratio of all share classes.
Special Considerations
Mutual funds are known for offering multiple share classes with multiple fee structures. Institutional share classes usually have the lowest expense ratio of all share classes offered by a mutual fund. They also don’t typically require sales charges.
Low fees make institutional share classes the most attractive class of fees for mutual fund investors. For that reason, many fund companies may offer various types of institutional share classes, some of which are tailored for high net worth investors.
Requirements for Institutional Shares
There is a broad range of institutional investors that are eligible to buy institutional shares. These investors typically maintain large investment positions of over $250,000. In most cases, an institutional investor will be a money manager responsible for the investment decisions of large investment programs.
Institutional investors include investment managers of retirement benefit plans, endowments, foundations, government units, institutional insurance accounts, corporate institutional accounts, and institutional investment funds. Institutional investors can also include financial intermediaries seeking to invest for high-net-worth clients.
Example of Institutional Shares
Vanguard’s Admiral Shares are one example. Admiral Shares expense ratios average 0.14%. To qualify for Admiral shares, the minimum required investment for index funds is $3,000. Actively managed funds have an investment minimum of $50,000. Certain sector-specific index funds may require a minimum investment of $100,000.
