Investment companies are taxed in a rather peculiar and arcane manner. Internal revenue law is written so that certain companies can make claims that allow them to be exempt from certain taxes. For example, companies that register as "regulated," agreeing to distribute 90 percent of more of their dividends and interest can avoid heavy taxation on capital gains paid to shareholders. The company must report to its shareholders the nature of payments (interest and/or capital gains), and the investor will be taxed upon these profits according to his tax bracket.
That the performance of the investment companies would be subjected to various degrees of criticism is not difficult to understand. Such a diversity of funds, each trying to achieve certain objectives and not all being uniformly successful may mean that the failures undoubtedly become magnified without taking into consideration the degree of risk involved. Investment companies will involve a degree of risk, which is commensurate with the type of portfolio they set up and the relative success or failure of the management to achieve their stated objectives; this is not much different from an individual's successes or failures. The main differences seem to be that the purchaser of the investment company shares seems to feel that he is buying management services and that, therefore, such a management cannot make a mistake! Unfortunately, we are all human and mistakes may even be made by a board of directors as well as an individual.
Another strong criticism, which is frequently heard, is that the performance of a fund is no better than an individual investor's would be if he is well informed and his sense of timing is good. Comparison of fund performance with various stock indexes, such as the Standard & Poor, have been made and have shown striking results in the case of some funds and rather mediocre performances for others. Investigations have also been made in order to appraise the management, since this is the most important matter requiring some sort of yardstick. The main point, however, is usually overlooked: the fact is that the neophyte investor is not so well informed as he should be, nor has he relatively large funds at his disposal; consequently, his participation in one of the investment companies may well be justified; and if the management produces results, he will be well paid for the initial loading charge.
For the investor himself, there is some sort of moral in all this. One does not rush blindly into the purchase of investment-company shares any more than a prudent man would rush to buy the stock of newly formed XYZ Electronics Company. Intelligent decision depends first upon what the investor wants for himself: income, capital gains, conservatism of principal, or even a bit of each; having decided what his ultimate aim may be, the next step is the selection of an appropriate fund—and here he may be quite bewildered, for there are so many. In order to make a satisfactory choice, he should study the prospectuses of a number of them, paying particular attention to those funds, which have had a better-than-average performance over at least a decade.
Time is of the essence when exploring funds in which to invest: longstanding funds with records of good integrity should be considered far above the new kid on the block funds with flashy marketing schemes and fast-talking salesmen. Just like buying an automobile, one must know the truth behind the surface before commiting one's savings to an investment.