Financial Investment Companies - An Overview

The general public today has a wide variety of investment options to choose from. An investor can buy stocks listed in the stock market, invest in government or corporate bonds or trade in the commodity markets. The multitude of investment choices can sometimes leave an inexperienced investor exposed to difficult decision-making with regard to what he or she should invest in. Investment companies can make those decisions regarding investment choices for the individual investor.

The unseasoned investor also faces risk due to the volatile nature of the stock market and if there has been a wrong choice of stocks. Investment companies can shield the general investor against the inherent risk in the stock markets as all investment strategies and portfolio decisions are made by them. All investors have to do is to invest in the investment company itself.

So what are investment companies and what are the different types? This article explores the concept and some forms of an investment company. The article also takes a look at the investment portfolios and performance of an investment company.

Investment Companies - Mutual Funds

According to the Securities and Exchange Commission (SEC), a financial regulatory authority in the US, an investment company is an entity which mainly engages in investing in securities - stocks, bonds, and money market instrument.

Investment companies issue shares or units themselves to generate the capital needed for investment. The general public can buy shares in the investment company which means they are entitled to a share in the profits made by it. The collective capital generated from the issue of shares is invested by the investment company in various investment options.

A mutual fund is a type of Investment Company. People buy units or shares in a particular mutual fund according to the Net Asset Value (NAV) of each unit. The mutual fund in turn has a fund portfolio with investments in a variety of stocks, bonds and the money market. A professional fund manager manages the fund portfolio.

Any profits or returns are distributed to the mutual fund investor according to the number of units of shares the investor holds in the form of dividends.

Mutual funds are a great help to individual investors who want a diversified investment portfolio, but do not how to build one. As there are a large number of investors in a single mutual fund, individuals can get exposure to a variety of good quality stocks without investing a large amount of money. Of course, the services of a professional fund manager also make the task easier for an individual investor.

Mutual funds are typically known as open-ended investment companies, as the number of shares or unit that can be issued by them is flexible.

Other Types of Financial Investment Companies

Apart from mutual funds, there are other types of financial investment companies that also mainly invest in financial instruments such as bonds, equity, currency and debt markets.

Here are two other types of financial investment companies: -

• Unit Investment Trust (UIT) - This is like a mutual fund as it issues units or shares at an NAV to the general investor. However, UIT is a form of financial investment company that issues one-time shares or unit, which are fixed in number, as in a closed-ended fund. There is a secondary market for UIT units where they can be sold and bought again. UIT investment companies have termination dates on which they dissolve. They do not actively trade in securities as compared to mutual funds. Their investment portfolio is usually fixed.
• Closed-end Funds or closed end companies - Closed-end funds offer shares or units at a fixed time and the number of units is also fixed. This is unlike most mutual funds, which are open-ended. Once the fixed number of units is sold, the same units or shares of the closed-end funds can be traded on a secondary market such as the stock exchange. Then the units of the closed-end funds are sold a different price from the NAV of the closed-end funds.

All types of financial investment companies such as mutual funds, UITs and closed-end f are regulated by the SEC in the US by the Investment Company Act of 1940.

Investment Company Portfolio - American Mortgage Investment Company

Investment companies may have securities in their portfolio such stocks, corporate bonds, debt securities and money market instruments.

The SEC excludes certain types of investments from consideration in its definition of an investment company such as government bonds. The SEC also stipulates that an investment company that has less than hundred investors cannot be categorised as an investment company.

An investment company invest in the debt market in the form of house mortgages. For example, an American mortgage investment company would include mortgages in America in its portfolio.

The sub prime lending crisis in the US real estate sector and the subsequent global financial crisis in 2007 would have ensured huge losses for any American mortgage investment company. The crisis affected all those in the world over who had exposure to the American mortgage sector.

Performance of An Investment Company

The performance of an investment company is measured in terms of their return, which is the dividend it is able to distribute to its investors as also capital appreciation. This is directly linked to the performance of the assets in the investment portfolio of the investment company. Some measures of performance of an investment company are expense ratio, total return and yield.

There may be different investment objectives, which may reflect the choices in its portfolio. Some may opt for riskier stocks for high returns, while others may concentrate just on aspects of steady, regular income. The brochures and websites of an investment company will give an investor an idea of its portfolio and past performance history. Many financial websites and print news media also track the performance of investment companies.