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Section: 1 Investment Companies
Investment companies, commonly known as Mutual Funds, 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 "team up" to obtain the benefits of large-scale investing.
Investment companies perform several important functions for their investors:
i) Record Keeping and Administration: Investment companies issue periodic status reports, keeping track of capital gains distributions, dividends, investments, and redemptions. They may also reinvest dividend and interest income for shareholders.
ii) Diversification and Divisibility: By pooling their money, investment companies enable investors to hold fractional shares of many different securities. They can act as large investors even if an individual investor cannot.
iii) Professional Management: Most, but not all, investment companies have full-time staffs of security analysts and portfolio managers who attempt to achieve superior investment results for their investors.
iv) Lower Transaction Costs: Because they trade large blocks
of securities, investment companies can achieve substantial savings on brokerage
fees and commissions.