An investment company is a cooperative agency, the purpose of which is investing the contributed funds of its members into a diversified portfolio. The administration of these portfolios rests entirely upon the management.
In this manner the investor is able to participate in diversified investment without being under the necessity of making any selections himself and also is able to obtain the managerial supervision, which he himself could not provide. Investment companies have been known by various titles, such as investment trusts, mutual funds, etc.; their origins in the United States are relatively recent, many having been founded prior to the depression of the thirties.
In 1940 the Investment Company Act became a law, providing for strict regulation in order to protect the investors themselves; included are matters such as the outlining of basic investment policies, the publication of semiannual reports, regulation of sales practices, the minimum capital requirements, nature of debt, qualifications of directors, etc. It is considered by many that the passage and enactment of the Act ushered in an entirely new era for the investment companies because of the disappearance of certain questionable practices of the past.
It must be quite obvious that the objectives of a given investment company may be very different from those of another; indeed, the objectives are as varied as those of individual investors. Some companies are exceedingly conservative and confine their purchases to good-grade bonds and/or preferred stocks; some, at the opposite extreme, deal exclusively in common stocks; still others, commonly known as "balanced funds," invest in both bonds and stocks, the proportion being varied in order to meet certain considerations dictated by the existing economy.
Evidently, the degree of risk may also be quite varied, since it is well understood that investment in good bonds is conservative, while investment in common stocks may involve a certain amount of speculative risk. The degree of risk entailed by investment in a particular company will largely depend upon its own investment objectives, which must be definitely stated under the Act of 1940, and these may not be changed without stockholder approval; consequently, the prospective investor has some previous knowledge of the nature and aims of the company in which he proposes to invest; the company literature (known as the "prospectus") will set this down in no uncertain terms.
In some cases, the very title itself may indicate the nature of the company, such as "The Ultraconservative Bond Fund," the "Galloping Growth Fund," the "PDQ Petroleum Stock Fund," etc. However, this represents only one side of the coin. The other is the long-range investment policy, which may take the form of continued income, capital gains, growth within an industry, etc. It is easily seen that the investor will have a very wide variety of investment companies from which he may make a choice, both as to the nature of the company's portfolio and the long-range objectives as well.
Investment companies are usually corporations, although a few are Massachusetts trusts. All final decisions regarding policy, purchase and sale o£ portfolio securities, research, declaration of dividends, etc., rest with the directors or trustees, as the case may be. Sometimes the advice and research portion may be handled by an investment counsel firm under contract, by which all such advice and research are furnished for a stated fee. Even management may be handled on a contract basis, since there are firms, which make a business of doing this work. It may be remarked that the use of subcontracting is a means of reducing expenses and this is now quite common practice.
The upshot of using an investment company is that it is practically a "hands-off" process for the investor. You trust the company to invest your money in an intelligent manner and create a diversified portfolio for you, and luckily there are laws in place that protect your investments.