What are Institutional Shares?

Institutional shares are mutual fund shares that are offered for sale to institutional investors only. In most cases, large blocks of these shares are sold as part of a package deal. In return for purchasing the larger volume of shares, the institution often receives some price breaks, including a discount on the transaction charges that are incurred as part of the purchase agreement. Owing to the fact that institutional shares are sold in large blocks, individual investors rarely, if ever, are in a position to purchase these types of investment shares.

A number of different businesses or institutions may choose to purchase institutional shares. In general, the idea behind the purchase is to hold those shares for long-term investment purposes, effectively creating a steady revenue stream for the institution. Businesses sometimes use this approach as a means to generate revenue that is set aside for the retirement plans offered to employees. At other times, the return generated from the shares is funneled into other ongoing products that are operated by the company.

There are several different types of entities that are likely to be interested in institutional shares. Along with corporations looking for a way to create a revenue stream to fund retirement plans, insurance companies often make use of this investment model to maintain a steady flow of return that can be used to honor claims submitted by their customers. In like manner, banks often purchase institutional shares as a way of generating income to fund bank operations, as well as generate funds to pay interest on all customer accounts that are structured to earn interest off the account balances. Independent pension funds will also purchase institutional shares as a means of generating revenue that is pumped back into the fund, keeping it viable over the long term.

In many cases, institutional shares are referred to as Y shares or Y class shares. This is because the shares are usually issued with a special letter class that helps to differentiate the shares from other classes that are widely available to individual investors. This special letter class is often included in the descriptive fund symbol that is used to identify the shares in the marketplace, making it much easier for potential investors to research the past performance of the shares without confusing them with other classes of shares issued by the same entity. The class of shares may also play a role in how swaps are conducted within a given mutual fund, since an investor is limited to swapping one set of Y shares for a corresponding set of Y shares available within the mutual fund.