Definition: The Investment Companies are the non-finance banking companies that are primarily engaged in the business of buying and selling of securities. Simply, a company that pools the resources of investors to reinvest it in the marketable securities ranging from shares to debentures to money market instruments are called the investment companies.
The investment companies hold the securities of other companies solely for making the investments. Here, the fund manager decides the type of security in which the pooled money is to be invested in order to have a diverse and a managed portfolio.
Basically, the investment companies are divided into three types:
- Open-End Management Investment Company also called as Mutual Funds, has no limit on the number of units the fund issues which means, the investor can continuously buy or redeem its shares at the current net asset value (NAV). The Open-end mutual funds are more convenient for the investors since it enables them to buy as many shares as they want and can easily redeem it at their disposal.
- Closed-End Management Investment Companies also called as Investment Trusts, issues a fixed number of shares through initial public offerings. These are essentially the publicly traded companies that raise a fixed amount of capital through the issue of a fixed number of shares traded on the stock exchange. Here, the shares are limited and hence the investors cannot buy as many shares as they want and similarly they cannot sell their existing shares before the expiry of the scheme. But, however, if any investor seeks to sell his shares the same are traded on the stock exchange.
- Unit Investment Trusts also called as Unit Trusts share the similarities of both the closed end and open end mutual funds. Here also, the investment company holds the portfolio of stock, shares, debentures and other money market instruments purely for investment purposes. Like, open end funds, most of these can be bought and sold directly from the issuing investment company while in some instances these are also traded on the secondary market. Unit trusts often have a low minimum investment requirement and the shares can be bought and sold anytime the investor wants.
The investment companies give an advantage to the small investors to make the investments in the wide array of securities which otherwise could not have been possible.