An endowment fund is an investment fund that is set up by a foundation and makes withdrawals from the interest generated. The money from the fund is usually used for specific needs or to further the operations of an organization. Most of these funds are mainly funded entirely based on donations. This could be the reason why many wonder what is an endowment.
The principal amount is designed to remain intact throughout the life of the fund. This article is going to examine endowment in detail. It will also examine how it can be used for the purposes of charitable courses.
An Outline of Endowment Funds
If you want to understand what is an endowment, you need to understand its purpose. An endowment mainly acts as a reliable source of income for any organization. An organization is always assured of having some money to fulfill some of its charitable work.
A board of directors usually designates the funds in an endowment fund. They set up the spending and investment policies for the fund. Thus, an endowment program is designed to grow. That way, it can generate enough money today and in the future. Besides that, some of the growth results from additional donations. Thus, a fund can support the same number of students today as in two decades time.
What Is an Endowment? 7 Key Steps to Your Answer
1. Agree on the Purpose
You will need to know what in an endowment and how will it be used by your organization. You will need to work through the pros and cons of what is an endowment. That way, you will be able to agree on whether you need it in the first place.
You will be surprised to hear that everyone has different ideas on what is an endowment and how it should be used. For instance, do you need it to pay for new programs, provide fundraising relief, or to start a new satellite office? The purpose you agree on will help you determine how big it is going to be.
2. Authorize the Creation of the Endowment
The board will fulfill this duty. It signals commitment towards the creation of the fund that will hold the money in perpetuity.
By creating the endowment, they agree to take on the responsibility to manage it. It will appear as a separate line in their financial reports.
3. Create the Policy
The policy is simply a guideline indicating what is an endowment created for and how any profit will be used to fulfill this purpose. The challenge here will be to create a policy to meet all the needs without being vague about where to establish the boundaries.
Take time and think about the details carefully. The policy should be flexible enough to contain details of how it will adapt to expected changes.
4. Come Up With the Invasion Policy
It may sound bad, but invasion just means using the principal amount. You would not want the principal amount of what is an endowment to be touched. Thus, you need to create a policy so that it can only be used when times are hard. Most funds have an invasion policy when the invasion can only take place if the organization is about to close down.
In some other cases, the policy is that the principal can be used to balance the budget for about two years. Other situations may come, when the principal can never be touched. In the policy, it is important to detail how much can be taken out at any period. It should also detail by when it has to be put back.
5. Create a Gift Acceptance Policy
You may have a policy for gift acceptance in the organization before creating the endowment. However, you will need to create a special policy to handle the endowment. You can adapt the existing policy or create a new one. In this policy, detail the kinds of gifts you can accept. Besides that, detail who has the authority to accept the gifts. For instance, detail whether you will accept land, buildings, or collectibles.
Some gifts can be hard to monetize, which makes them of little use to the organization. Additionally, you may reject gifts based on beliefs. For instance, if you accept stocks, are there industries that you do not support? In most cases, experts recommend that endowments accept only cash, life insurance, and securities only.
6. Create an Investment Policy
The investment policy will detail whether you will invest for income only or for both the growth of principal and income. Additionally, this policy will contain details of whether you will make only socially responsible investments.
Sometimes, you can have restrictions that filter out gun and tobacco companies or those that are not supportive of unions. You can also have a policy detailing how you will prioritize investment opportunities. To get everything right, a few investment experts should be brought in for discussions. This will help the board to make informed decisions.
7. Create an Investment Committee
Once the endowment is in place, the board should come up with an investment committee. In this committee, non-board members can be included. Although the committee will manage the fund, the board will have a supervisory role.
It is important to select a committee that has the same beliefs as the principals of the endowment fund. In this regard, they should be mainly drawn from people who have been involved in charity work in the past. Besides that, they should be people who have not engaged in activities that could damage their reputations.
Once the endowment has been authorized and all policies have been created, you can announce the fund and begin to to raise it. You will need to conduct many awareness campaigns to get donors interested in your fund.
At the core of it all, you will need to have integrity. Anything that gives the fund a bad name could permanently damage its chances of ever getting any support.
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