The fund, to be called W. Health, has been designed to complement Nestlé's own research and development facilities.
Many food firms have spent the last couple of years adapting to consumer demand for healthier foods, including functional food, and Nestlé, the world's biggest food firm, is no different.
Nestlé said it had initially put €500m into the investment fund, but may increase this. Its aim is to grow promising new food businesses in the science-based nutrition sector.
Francois-Xavier Perroud, a group spokesperson, said last autumn the fund would have a broad mandate in the types of processes and foods in which it would put money into.
"The new step will contribute significantly to fostering and accelerating the group's expansion into health, wellness and nutrition, as the new fund will be investing in companies with products or processes in the final testing stage or about to come on the market," he said.
Wolfgang Reichenberger, Nestlé's now ex-chief financial officer, will run the fund in partnership with Gunnar Weikert, the chairman of Inventages Venture Capital Investments.
Swiss-based Nestlée is facing tough home markets on the continent. Like its competitors Nestle has struggled to boost sales as consumers rein in spending in Europe. Europe's supermarkets have been cutting prices to meet the challenge of discounters, forcing producers to provide goods for less at a time when input and commodity and fuel costs have been rising.