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.

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.

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.

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:

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