Mutual Funds and Other Investment Companies

Commonly, individual investors do no trade securities directly for their own accounts. Instead they direct their funds to investment companies that purchase securities on their behalf. The most important of these financial intermediaries are open-end investment companies, more commonly known as mutual funds, to which we devote most of this post.

Investment Companies

Investment companies are financial intermediaries that collect funds from individual investors and invest those funds in a potentially wide range of securities or other assets. Pooling of assets is the key idea behind investment companies. Each investor has a claim to the portfolio established by the investment company in proportion to the amount invested. These companies thus provide a mechanism for small investors to “tear up” to obtains the benefits of large-scale investing.

Investment companies perform several important functions for their investors:

  • Record keeping and administration.
  • Diversification and divisibility. ( due to large-scale )
  • Professional management. ( professional analyst and portfolio managers)
  • Lower transaction cost. ( due to large-scale )

Types of Investment Companies

The portfolios of unit investment trusts are essentially fixed and thus are called “unmanaged”. In contrast, managed companies are so named because securities in their investment portfolios continually are bought and sold: The portfolios are managed. Managed companies are further classified as either closed-end or open-end. Open-end companies are what we commonly call mutual funds.

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