Last Updated on May 24, 2022 by Anjali Chourasiya
An investment company is essentially a financial institution that is engaged in investing in securities. Though personal research takes precedence where investment is concerned, investment companies offer a trustworthy platform for managing enormous corpuses efficiently. Such companies hire experienced fund managers and advisors to drive profits for investors and clients by buying and selling shares, property, funds, and other assets. Let us understand what is an investment company, its types and more.
Table of Contents
What is an investment company?
An investment company is a trust or entity that collects capital from various investors and invests the pooled money in a range of financial securities. The profits or losses made from those investments are then passed on to the investors in proportion to their investments.
An investment company can be publicly owned, privately owned, corporation, partnership, firm, trust, or limited liability company (LLP). Irrespective of its nature, its primary objective is to manage investments in the stock market and various other avenues for its customers.
Types of investment companies
Investment companies are of the following two types:
Open-end investment companies
Open-end investment companies invest in fairly liquid assets that have their value fluctuating over time. The price of these shares is defined by ‘net asset value’ (NAV). NAV signifies the present value of the securities held by the investment company.
Their demand in the market determines the price. If new investors want to invest in these funds, then the company would be required to issue new shares. In case an investor wishes to redeem their investment, they shall be paid out and their shares would stand cancelled.
Closed-end investment companies
The modus operandi of a closed-end investment company stands in stark contrast with open-end investment companies. Such companies issue shares (generally through IPOs) that can be traded just like the shares of any private company in secondary markets.
Though the number of shares to be issued is fixed, the management holds the right to revise the issue of equity shares and preferred stocks. The diversification of investments in the case of closed-end investment companies is more, making them highly flexible.
Benefits of investing with an investment company
Capital cost and allocation: You might rue that you may personally copy the portfolio of a landmark investment company and reap the same benefits.
But, there are two problems you’d face in the process, which are trading costs and lack of access to many unlisted companies. But investment companies offer a counter on both. For each of your investments, you’ll have to incur a percentage of trading cost, which to a fair extent is fixed. Since investment companies do it on a massive level, they enjoy economies of scale. On the other hand, all investment avenues might not be available to you. For example, an investment company may invest in the shares of an unlisted company that might be requiring a minimum threshold way bigger than your capital.
Safeguard against hidden risks: Risk is always inherent in any investment. Sometimes, they are visible, sometimes not. Investment management companies help to detect these risks and find a way to tackle them more astutely. For instance, investment companies will understand better the hidden risks of investing in companies that follow seasonal cycles through their varied experience and expertise.
Professional judgement: Investment management companies purvey well-calculated plans and schemes based on your assets and help you invest in a safe and secure environment. They weed out suspicious and unreliable sources of investment that you cannot possibly catch on by yourself.
Asset management: An investment management company would benefit you by handling your assets on your behalf. They oversee the flow of your assets and financial statements to carefully plan your investment road map. This, in turn, helps formulate a better portfolio of investments to gain long-term profit while maintaining liquidity in your books to avoid putting you under any unpleasant financial situation.
Secure investment: If you are new to investing in the stock market, bonds, or other financial sources, there are chances you might step into a fraud zone. To avoid such mishappening, one may consider investing through an investment management institution that will provide unbiased information.
They can sieve various investment portfolios detecting the frauds, thus providing safe and secure investments.
Transparency: Since your funds can be invested in more than one investment, it would be quite difficult for you to keep an eye on all the records. Investment management companies help you manage and keep refined records of your investments and their returns. They give timely reports on the status of your invested funds and are also ready to clear your dubiety on financial statements. With open bona fide communication, everything is transparent, making it easy to understand your investment records.
Why park your funds with an investment company?
Taking the present scenario of India into consideration, fixed deposits are offering returns in the range of 6-7%. Now, for someone placed in the highest tax bracket (30%), their post-tax net income from FD would come out to be around 4.55%. But here, inflation is not accounted for.
The RBI has projected current retail inflation in India at 5.3% for the current FY 2021- 2022.
This means, your investment may not even beat the prevailing inflation, let alone provide a steady source of income.
This is where the worth of an investment company is realized. To provide you with a hedge against inflation, the fund managers use their skills, expertise, and experience to invest the pooled resources in the best financial instruments.
Secondly, people who don’t have time to track their investments actively can depend on investment companies to manage their funds.
Conclusion
An investment company, that may be public/private or a corporation, trust or LLP pools resources from investors to invest in various financial instruments and vehicles. They deal with enormous corpus and aim to generate returns for the investors and clients. They provide a range of financial and management services that include devising strategic plans that can be an effective counter to inflation. Understand the risk associated with investment companies and only then plan your investment move.
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