Institutional mutual funds can have lower expense ratios than other types of funds.
Mutual funds will often offer investors different types of shares, called classes, that offer different shareholder services and distribution arrangements with different fees and expenses, according to the Securities and Exchange Commission. Classes A through C are sold to the general public. But Class I shares are generally only available to private institutions. Institutional mutual funds can buy Class I shares, and they are generally available to organizations, endowments, foundations, trusts, municipalities and other institutional investors.
Regulation
As with other mutual fund classes, institutional mutual funds are regulated primarily under the Investment Company Act of 1940. The act allows companies to issue different categories of voting stock as long as they create certain distinctions between classes of shares, including shares that are available exclusively to institutional investors.
Institutional vs. Standard Mutual Funds
Expense ratios for institutional mutual funds are typically much lower than those for mutual funds available to the general public, although non-institutional investors can sometimes get comparable rates with index mutual finds, according to the SEC. Lower expense ratios mean these types of funds generally generate more profits for investors qualified to buy them.
Non-Institutional Investors
While institutional mutual funds are generally available only to institutional investors, many people in the general public have a portion of their assets invested in these types of mutual funds. That's because institutional mutual funds are popular investment vehicles for pension plans, which qualify to buy Class I stocks under SEC rules.
Other Investors
Many mutual fund companies market institutional funds to investors, especially high-net-worth individuals, who are not technically qualified to buy institutional class stocks under SEC regulations. That's because the SEC does not regulate how third-party administrators define institutional funds. Many funds marketed as institutional funds offer the low fees and cost savings of funds available exclusively to institutional stockholders, but they are open to the general public. Some of these so-called institutional funds are available to investors who can meet minimum investment requirements as low as $1,000, according to MSN Money. Others cater exclusively to high-net-worth clients. Wells Fargo and Hartford institutional funds, for example, required $10 million in initial investments in 2011.
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