Chapter: 4 Institutional Investors

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.