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Investment Companies

Investment Companies

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Published by ClassOf1.com
Investment companies, also known as asset management companies, manage the funds of individuals, businesses, and state and local governments, and are compensated for this service by fees that they charge. The fee is tied to the amount that is managed for the client and, in some cases, to the performance of the assets managed.
Investment companies, also known as asset management companies, manage the funds of individuals, businesses, and state and local governments, and are compensated for this service by fees that they charge. The fee is tied to the amount that is managed for the client and, in some cases, to the performance of the assets managed.

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Published by: ClassOf1.com on Apr 16, 2013
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Finance
LEARN TO EXCEL
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Experienced TutorsDetailed Explanationwww.classof1.com/homework-help/financeToll Free: 1-877-252-7763
 
 
Sub: Finance Topic: Investment
*
Investment companies
Investment companies, also known as
asset management companies
, manage the funds of individuals, businesses, and state and local governments, and are compensated for this service by feesthat they charge. The fee is tied to the amount that is managed for the client and, in some cases, tothe performance of the assets managed. Some asset management companies are subsidiaries of commercial banks, insurance companies, and investment banking companies. The types of accounts,clients, and lines of business of asset management companies include:
Regulated Investment Companies.
Regulated investment companies (
RICs
) are financialintermediaries that sell shares to the public and invest those proceeds in a diversified portfolioof securities. Asset management companies are retained to manage the portfolio of RICs.Various U.S. securities laws regulate these entities. There are three types of RICs managed byasset management companies: open-end funds, closed-end funds, and
unit investment trusts
 (UITs).
Mutual Funds
In
open-end funds
, commonly referred to simply as mutual funds, thenumber of fund shares is not fixed. All new investments into the fund are purchased atthe NAV and all redemptions (sale of the fund) redeemed from the fund are purchasedat the NAV. The total number of shares in the fund increases if more investments thanwithdrawals are made during the day, and vice versa.
Closed-End Funds
Unlike open-end funds,
closed-end funds
do not issue additionalshares or redeem shares. That is, the number of fund shares is fixed at the number soldat issuance (i.e., at the time of the initial public offering). Instead, investors who wantto sell their shares or investors who want to buy shares must do so in the secondary
 
 
Sub: Finance Topic: Investment
*
market where the shares are traded (either on an exchange or in the over-the-countermarket). Supply and demand in the market in which funds are traded determine theprice of the shares of a closed-
end fund. Hence, the fund share’s
price can trade belowor above the NAV. Shares selling below NAV are
said to be “trading at a discount,”
while shares trading above NAV are
“trading at a premium.” Investors who transact in
closed-end fund shares must pay a brokerage commission at the time of purchase andat the time of sale.
Unit Investment Trusts
There is a third type of RIC called a unit investment trust (UIT).This type of RIC is assembled, but not actively managed. A unit investment trust has afinite life and a fixed portfolio of investments.
Costs to Investors.
Investors in RICs bear two types of costs: (1) a shareholder fee, usually
called the sales charge, which is a “one
-
time” charge;
and (2) an annual fund operatingexpense, usually called the
expense ratio
,
which covers the fund’s expenses. The largest
expense component of the expense ratio is the management fee, which an annual fee is paidto the asset management company for its services. RICs are available with differentinvestment objectives and investing in different asset classes
stock funds, bond funds, andmoney market funds. There are passively managed and actively managed funds.
Passive funds
 are designed to replicate a market index, such as the S&P 500 stock index in the case of common stock. In contrast, with active funds the fund advisor attempts to outperform anindex and other funds by actively trading the fund portfolio.

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