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Investment Companies It is a company whose main business is holding securities of other companies purely for investment purposes.

The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. Three types of Investment Companies: 1. Open-end Management Investment Companies (Mutual Funds) A mutual fund is a professionally-managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short term money market instruments, and/or other securities. Since 1940, a mutual fund is one of three basic types of investment companies available in the United States. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles. Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not government insured, unlike bank savings accounts. Bond funds invest in fixed income securities. Bond funds can be sub classified according to the specific types of bonds owned (such as high-yield or junk bonds, investment-grade corporate bonds, government bonds or municipal bonds) or by the maturity of the bonds held (short-, intermediateor long-term). Stock or equity funds invest in common stocks. Investors in mutual funds pay fees. These fall into four categories: a. Distribution charges Distribution charges pay for marketing and distribution of the fund's shares to investors. Management fee The management fee is paid to the fund manager or sponsor who organizes the fund, provides the portfolio management or investment advisory services and normally lends its brand name to the fund.

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Other fund expenses Shareholder transaction fees Shareholders may be required to pay fees for certain transactions. Securities transaction fees A mutual fund pays any expenses related to buying or selling the securities in its portfolio. These expenses may include brokerage commissions. Securities transaction fees increase the cost basis of the investments.


Advantages of mutual funds: Mutual funds have advantages compared to direct investing in individual securities. These include: Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison Disadvantages of mutual funds Mutual funds have disadvantages as well, which include: Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

2. Closed-end Management Investment Companies (Closed-end Funds) A closed-end fund is a collective scheme with a limited number of shares. It is called a closed-end fund (CEF) because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates. In the U.S. legally they are called closed-end companies and form one of three SEC recognized types of investment company along with mutual funds and unit investment trusts.

Typically an investor can acquire shares in a closed-end fund by buying shares on a secondary market from a broker, market maker, or other investor as an opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly or redeeming shares. The price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium (or discount) placed on it by the market. The total value of all the securities in the fund divided by the number of shares in the fund is called the net (NAV) per share. The market price of a fund share is often higher or lower than the per share NAV: when the fund's share price is higher than per share NAV it is said to be selling at a premium; when it is lower, at a discount to the per share NAV. Some characteristics that distinguish a closed-end fund from an ordinary open-end mutual fund are that: It is closed to new capital after it begins operating, and Its shares (typically) trade on stock exchanges rather than being redeemed directly by the fund. Its shares can therefore be traded during the market day at any time. An open-end fund can usually be traded only at the closing price at the end of the market day. A CEF usually has a premium or discount. An open-end fund sells at its NAV (except for sales charges). A closed-end company can own unlisted securities. The total value of all the securities in the fund divided by the number of shares in the fund is called the net asset value. The market price of fund share is often higher or lower than the NAV. The market price of fund share is often higher or lower than the NAV: when the funds share price is higher than NAV it is said to be selling at premium; when it is lower, at a discount to NAV. 3. Unit investment trusts (UIT) A UIT is a US investment company offering a fixed portfolio of securities having a definite life.

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Unlike a mutual fund, a UIT is created for a specific length of time and is affixed portfolio, meaning that the UITs securities will not be sold or new ones bought, except in certain limited situations. Two main types of UIT: a. Stock trust Stock trusts are generally designed to provide capital appreciation and/or dividend income. b. Bond trusts Bond trusts issue a set number of units, and when they are sold to investors, the trusts primary offering is closed.

A UIT may be constituted as: a. Regulated Investment Corporation (RIC) A RIC is a corporation in which investors are joint owners. b. Grantor Trusts A Grantor Trust grants investors proportional ownership in the underlying securities.

A fourth and lesser-known type of investment company under the Investment Company Act of 1940 is a Face-Amount Certificate Company. Also popular are private investment funds which are simply private companies that make investments in stocks or bonds, but are limited to fewer than 100 investors, are private and are not regulated by the SEC. These funds are often composed of very wealthy investors. A UIT is created by a document called the Trust Indenture. This document is drafted by the Sponsor of the fund, and names the Trustee and the Evaluator. Because individual UITs are assembled and purchased for specific periods of time, the cost basis consists of the initial purchase price of the securities held in the trust. A mutual fund, on the other hand, taxes the individual based on the entire previous tax year regardless of the date purchased.