What Are Class Inst Funds?
Institutional Class Mutual Funds Definition: Class I, X, Y or Z
Institutional share class mutual funds are low-expense investments that are intended primarily for large institutions, such as pension funds and high net worth individuals. Institutional funds also typically have high minimum initial requirements. Institutional share class funds can be identified as I, X, Y or Z share class.
What Are Institutional Mutual Funds?
There a several different share classes of mutual funds. Most investors are familiar with A Shares, B Shares and C Shares. Institutional funds are classified as I shares, X shares, Y shares or Z shares. The primary difference between institutional funds and other classes of mutual funds is that the expenses are lower and minimum initial investment requirements are higher.
Who Can Buy Institutional Share Mutual Funds?
Institutional mutual funds can be purchased by more than just institutions. In some cases, individual investors may purchase these funds.
Here are the primary types of investors that can buy institutional funds:
- Institutions: Typical institutions include pension plans, 401(k) plans, hedge funds, endowments, and insurance companies.
- High Net Worth Individuals: Since the minimum initial investment for institutional funds can range from $25,000 to as much as $1 million, only those individuals with high account balances may afford to purchase institutional funds.
- 401(k) Plan Participants: Since a 401(k) plan can often qualify to buy institutional funds, an individual investor participating in their employer's 401(k) may buy shares, regardless of the minimum initial investment.
How Individuals Can Buy Institutional Funds
The smaller everyday investor can gain access to the institutional class shares when a mutual fund company allows for exceptions in employer sponsored retirement plans, where there is an expectation that the high minimums will be met with all of the individuals (the employees contributing to their respective accounts) pooling their money together to meet the minimums.
Advantages of Institutional Funds
In general, institutional class mutual funds can be superior to other share classes because the lower expense ratios typically translate into higher returns for the investors. This is because the fund is not withholding as much money for the purpose of paying the operating costs of the mutual fund.
For example, one mutual fund might have several different share classes available to investors. The one with the lower expenses will have the higher long-term performance. This is how institutional funds can be superior to other fund share classes.
Let's say the B share version of a particular mutual fund has an expense ratio of 1.00% but the Class I institutional share class has an expense ratio of 0.25%. If the fund has 10% total gain in any given year, the net return to B share investor would be 9.0% (10.00 - 1.00), whereas the return for the I share investor would be 9.75% (10.00 - 0.25). Over time, this extra 0.75% advantage can mean thousands of dollars more to the investor.
What Are Alternatives to Institutional Shares?
With exception of their employer-sponsored retirement plan, such as a 401(k), it's not common for an individual investor to gain access to institutional share funds. However, there are plenty of high quality, low cost funds for investors to choose from:
- No-load funds: Also known as "investor share" funds, no-load funds do not always have a formal share class title. Therefore you won't find a letter to describe the share class, such as A, B, C or I, at the end of the mutual fund name.
- Index funds: Because they are passively managed, index funds can be smart fund choices for do-it-yourself investors. Index funds have extreme because they are often highly diversified and charge extremely low fees.
- Exchange-traded funds (ETFs): ETFs are mutual fund-like investments that trade like stocks. Like index funds, ETFs are passively-managed and track the performance of a benchmark index. ETFs often have lower expenses than index funds and can have expenses lower than institutional funds.
Because of their extremely low expenses and extremely high minimum initial investment requirements, institutional funds are most appropriate for institutions, such as pension funds, and high net worth individuals. However, the average everyday investor can access institutional share funds in an employer-sponsored retirement plan, such as a 401(k).
For a low-cost alternative to institutional funds, individual investors may consider index mutual funds and exchange-traded funds (ETFs).
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
The Free Dictionary: "Institutional Fund." Accessed January 31, 2020.
Vanguard. "Index funds vs actively-managed funds." Accessed January 31, 2020.