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Types and Definitions of Investment Companies

Investment companies are financial intermediaries that collect funds from investors and use those funds to purchase financial assets. There are several major types of investment companies: unit investment trusts, which hold a fixed set of securities; managed companies, which are organized as corporations with boards of directors and hire external managers; closed-end funds, which issue a fixed number of shares that trade on an exchange; and open-ended funds, most notably mutual funds, which continuously offer new shares. Mutual fund performance is calculated using formulas that consider net asset values, income, and capital gain distributions over time.

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Fel Fresco
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969 views10 pages

Types and Definitions of Investment Companies

Investment companies are financial intermediaries that collect funds from investors and use those funds to purchase financial assets. There are several major types of investment companies: unit investment trusts, which hold a fixed set of securities; managed companies, which are organized as corporations with boards of directors and hire external managers; closed-end funds, which issue a fixed number of shares that trade on an exchange; and open-ended funds, most notably mutual funds, which continuously offer new shares. Mutual fund performance is calculated using formulas that consider net asset values, income, and capital gain distributions over time.

Uploaded by

Fel Fresco
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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  • Investment Companies: Defines investment companies as financial intermediaries that pool funds from investors to acquire financial assets.
  • Major Types of Investment Companies: Covers various types of investment companies, including unit investment trusts, managed companies, and different models of investment.
  • Mutual Funds: Focuses on mutual fund performance, including calculations for return and average return benchmarks.

INVESTMENT COMPANIES

1
INVESTMENT COMPANIES

• INVESTMENT COMPANIES
DEFINITION: a type of financial
intermediary who obtain funds from
investing to use in purchase of financial
assets
– investors receive certain rights in exchange

2
MAJOR TYPES OF
INVESTMENT COMPANIES

3
• UNIT INVESTMENT TRUST
– DEFINITION: an investment company that owns a
fixed set of securities for the life of the company.
Two main types of UIT are:
Stock trusts: Stock trusts are generally designed to
provide capital appreciation and/or dividend income.
They usually issue as many units (shares) as necessary
for a set period of time before their primary offering
period closes.
Bond Trusts: Bond trusts issue a set number of units, and
when they are all sold to investors, the trust's primary
offering period is closed. Bond trusts pay monthly
income, often in relatively consistent amounts, until the
first bond in the trust is called or matures.
4
MAJOR TYPES OF
INVESTMENT COMPANIES
• MANAGED COMPANIES
– WHAT ARE THEY?
• organized as corporations with a board of directors
• management company is hired
• annual management fees vary from .5 to 1% of the
average market value of the company’s total assets

5
• CLOSED-END INVESTMENT COMPANY
• is a collective investment model based on issuing a fixed number of
shares which are not redeemable from the fund.
– FEATURES
• shares are traded on an exchange
• unlimited life
• dividends received paid out to shareholders
• can issue shares to raise additional funds
– quotations
• market prices published daily
• NAV published weekly

6
MAJOR TYPES OF
INVESTMENT COMPANIES
• OPEN-ENDED INVESTMENT
COMPANIES
– most known as mutual funds
– continuously offer new shares to the public
– capitalization is open

7
MUTUAL FUNDS

• MUTUAL FUND PERFORMANCE


– CALCULATING RETURNS:
• Formula:
rt = {(NAVt- NAVt-1) +It + Gt}/ NAVt-1
where rt = return at time t
It = income
Gt = capital gain distribution at
time t

8
MUTUAL FUNDS

• AVERAGE RETURN
– Style Analysis
• used to derive appropriate benchmark
– Ex Post Alpha Derived
• formula:
ap = arp - arbp
where ar p = the average return on portfolio p
arbp = average return on the benchmark

9
MUTUAL FUNDS

ap = arp - arbp
If ap > 0, the portfolio has performed well

10

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