Understanding endowments in India

As a relatively recent phenomenon, endowment funds in India are very much part of a developing landscape. A definition may be helpful to those unfamiliar with these funds: Endowments are comprised of donations (money or other financial assets) used for specific purposes. The principal amount is invested, and the income generated from this investment is used for purposes specified by the endowment. Endowment funds in India are managed by:


  • Educational institutes such as the Indian Institute of Management (IIM), Indian Institute of Technology (IIT), autonomous organizations (under the Government of India) and other private sector organizations
  • Religious organizations, hospitals and other charitable organizations
  • Other not-for-profit organizations

In this article, we take a deeper look at educational organizations’ endowment funds and highlight the need to revisit the investment practices used to manage these funds.

Missed opportunities

Educational institutes in India (particularly the older ones in the public domain) oversee a sizeable amount of funds. A study of the latest annual reports from a cross-section of five IIMs and IITs reveals that the value of designated/earmarked/endowment corpus funds is over US$200 million (Rs. 1,900 crores). The earmarked / endowment funds of the older institutes’ (among these five) are over US$95 million (Rs. 700 crores).


However, many of these educational institutes may not be optimally managing these funds. Bank fixed deposits (FDs) are clearly the preferred investment product for these long-term funds. The annual reports show that even corpus funds — which are sizeable — are invested in bank FDs (although, understandably, this could be because these are short- to medium-term funds used for operating expenses). But an over-reliance on FDs could be problematic for educational endowment funds in India in the long run.


Many premier educational institutes do not appear to be exploring safer and better-yielding investment options available to them. Most of these organizations seem to follow the investment regulation defined in Section 11(5) of the Income Tax Act, which allows investments in other investment products apart from FDs. These include sovereign and near sovereign bonds, bonds issued by a specific category of issuers and mutual funds. Yet educational institutes have largely shied away from looking beyond bank fixed deposits and have failed to adopt a more structured approach to managing their investments. As a result, they may be missing opportunities to manage their funds more effectively and achieve a higher level of financial independence.  


In addition, the investment processes and policies that guide the management of these endowment funds are often unclear. The annual reports include schedules explaining income from investments. However, these reports rarely cover other investment aspects, such as risk profile, liquidity, the framework for selecting FDs of a particular bank, reasons for not investing in other investment products and the investment process. More transparency, and more clearly articulated investment approaches, could help uncover areas of opportunity for these funds.

Lessons from leading international educational endowments’ investment practices

Well-managed endowment funds benefit from investing in more diverse asset classes, which helps them address the financial needs of the educational organizations they support.


One of the largest academic endowments in the world, Harvard University’s endowment corpus is US$41.9 billion as of December 2020.1 A separate entity, Harvard Management Company, manages the endowment. Its asset allocation comprises a broad mix of investments across public equity, private equity, hedge funds, real estate, natural resources and bonds. Stanford University, whose endowment corpus is US$28.9 billion as of August 2020,2 also favors investing in diverse asset classes. Its asset allocation includes natural resources, domestic equity, international equity, fixed income and cash, real estate and private equity. The fund is managed by the Stanford Management Company, which operates as part of Stanford University, with oversight provided by a board of directors appointed by Stanford’s Board of Trustees.


Both endowments are a vital source of financial support for their respective universities, helping to further their teaching, learning and research objectives. Interest generated by endowments/corpus funds is the next most important source of funds after the tuition fee in the US.


Although we can’t draw a direct comparison because the Indian context is different, there is scope for public educational organizations in India to do more without mimicking a Western approach. Instead of relying heavily on grants-in-aid from the government, donors and tuition fees, educational institutes in India should develop a more structured approach to managing their funds to build a more sustainable future for their organizations.


1Harvard University. Financial Report: Fiscal Year 2020. Available at https://finance.harvard.edu/files/fad/files/fy20_harvard_financial_report.pdf.

2Stanford University. “Finances.” Available at https://facts.stanford.edu/administration/finances.

Dealing with imagined fears

The first step in developing this more structured approach? Start small by considering options beyond fixed deposits. Many educational institutes in India may be anxious about exploring less-familiar investment options. However, these fears only hold them back and prevent them from capturing opportunities to realize more robust returns.


Fixed deposits with banks cannot be the default investment choice. Investing the entire corpus into only one type of instrument or asset class is not the right approach to portfolio management. Fixed deposits can be part of the instrument basket within a defined limit, with the flexibility to change it as interest rates shift.


Educational institutes can do more to improve the financial health of their investment portfolios by asking themselves these urgent questions:

  • Strategic questions


    1. What are we doing now, and does it support what we want to do in the future?
    2. How can the board build resiliency into the governance framework for managing funds?
    3. Should the board/existing finance committee appoint an investment sub-committee for increased focus?
    4. What kinds of policies and procedures should the board adopt to guide the investment committee?
    5. What roles and responsibilities should internal and external stakeholders assume?
    6. What role should the finance function play as part of the finance/investment committee? How can we manage overlaps?
    7. How should we flag and manage conflicts of interest?
    8. What are the global and domestic best practices of educational endowment funds?
    9. What about fiduciary responsibility? 


  • Tactical questions


    1. How should funds be segregated?
    2. Will each fund’s investment policy be different?
    3. How will we draft the investment policy document to adhere to applicable investment regulations and risk profiles?
    4. How and when will investments happen? How will we define the investment process flow, approval process and timelines?
    5. How will we monitor investments? What kinds of reports will stakeholders require?


The course ahead

A healthy endowment fund reflects an institute’s ability to raise funds from non-fee/non-government/external sources, which helps achieve a higher level of financial freedom. We suggest portfolios become an area of focus, making portfolio returns one of the top line items in the income statement, with tuition fees being the other.


Organizations that have made no progress in this area can immediately start by determining the strategic asset allocation. They should review all funds under operation and their segregation based on their objectives and end use. This review will help in creating appropriate liquidity windows and choosing the appropriate instruments/tenure. The next step should be drafting detailed investment policies for each fund and setting up respective bank and demat accounts for better oversight and control.


Options that fit the prescribed investment regulations should be used optimally. Suppose there is discomfort with manager-managed products such as mutual funds. In that case, investments in government bonds, State Development Loans (SDLs) and bonds issued by highly rated Public Sector Undertakings (who qualify as per the regulation) should be considered, keeping the long-term horizon in mind. These can be held to maturity to reduce the risk of any mark-to-market losses.  


To help increase the financial and overall operational independence of higher educational institutes, the Government of India has introduced policy interventions like the Centrally Funded Technical Institute (CFTI) Endowment Fund. These interventions encourage technical institutes (such as IITs) to tap their alumni networks and industries for funds and set up separately managed endowments with donor oversight. It’s a step in the right direction. Once these processes are fully operationalized, the focus on investment portfolios will increase, allowing educational institutes in India to set aside their imagined fears and embrace a more structured approach to managing their endowment funds.

Akhil Sharma
Senior Consultant – India Investments



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