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Investment Company - What Is, Working, Types, and Benefits

Investment Company - What Is, Working, Types, and Benefits

In this blog, we will introduce you to what an investment company is, the types of investment firms, some of the giants in the industry, and the benefits these companies have for investors. Recapitulation of Financial Accounting is an indispensable subject to explore and, therefore, get the insight to delve more into the process of analyzing and investing money and value in various financial assets. 

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What is an Investment Company?

What is an Investment Company

Investment management companies are the type of financial bodies that reinvest the pooled capital from multiple investors to generate funds and value by investing the pooled money in various financial assets.

Below-mentioned points explain more about investment firms:

  • The share of profit and loss is calculated based on the share in the invested company.
  • Considering an example, an investment organization called X  pooled ₹1 crore from multiple investors and reinvested it in multiple small organizations. Suppose one of the investors invested ₹10 lakhs, then its invested value in the company will be 10%.
  • The funds are pooled in three ways, including mutual funds, closed-end funding, open-end funding, and unit investment trusts.
  • These investment firms are known as fund companies or fund sponsors. Majorly involved in selling mutual funds, bonds, cash, and many more to third-party distributions.
  • An investment company can work under two types of ownership, including private or public ownership.
  • Investment firms assist small investors in diversifying their portfolios, helping them to reduce investment-associated risk and gain access to expert financial management services.
  • Particularly during times of crisis, they engage seasoned finance managers who can make spectacular economic judgments for the customer.
  • Some famous examples of investment companies are Bajaj Allianz General Insurance Company Limited, IDFC Company Limited, L&T Mutual Funds, SBI Mutual Funds, and many more.

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Working of Investment Company

Working of Investment Company

The objectives of an investment firm are pretty straightforward. Below is a list of various steps performed by the investment company.

  • In the beginning, funds are pooled from various investors. Various investment parameters are checked, including time of investment, risk factors, history of the firm, market conditions, and many more.
  • Based on the analysis and requirements, these funds are substantially reinvested in various small organizations to increase their revenue and portfolio.
  • The money is invested in the form of equity, debt, stocks, shares, properties, and many other asset classes.
  • Once the funds are generated, based on the investment shareholding, profit, and loss are calculated.

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Types of Investment Firms

Types of Investment Firms

There are mainly three types of investment companies responsible for the pooling of funds. 

Below are the various types of investment companies.

Open-end –
This type is aliased as Mutual Funds. Open-end organizations sell their shares periodically as a form of reinvestment. Commonly known as mutual funds, these companies sell shares constantly. At any point in time, they are ready to buy investors’ shares at their net assets. The shares of open-end businesses can therefore be redeemed.

Closed-end –
Closed-end funds are a type of investment company that issues a fixed number of shares. Once the shares are issued, the fund cannot issue any more shares.

Unit investment trusts –
Unit investment trust (UIT) is a type of investment company that invests in a fixed portfolio of securities, such as stocks or bonds. When the portfolio is sold and the funds are distributed to investors, the UNIT will eventually dissolve on a specific date.

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Benefits of Investment Company

Benefits of Investment Company

Specialized financial firms known as investment companies are mostly responsible for the pooling of funds. These businesses are well-liked by those trying to increase their money since they provide a wide range of advantages for investors. 

The following are some major benefits of investing in an investment company:

  • Portfolio Diversification: They provide investors with a diversified portfolio of investments. These companies can invest in a wide range of asset classes, reducing the risk of relying on a single investment.
  • Professional Financial Management: Experienced professionals are hired by investment firms to provide financial consulting services to clients. These professionals utilize their experience and in-depth knowledge to provide financial solutions.
  • Liquidity: This liquidity feature provides investors with the ability to manage their investments based on their changing financial needs.
  • Affordability: Investment companies offer investors the opportunity to participate in a diversified portfolio of investments with a relatively small amount of capital. This makes it accessible for individuals with limited funds to invest in a diversified portfolio, which may not be possible if investing individually.
  • Transparency: This feature of transparency allows investors to make informed decisions and keep track of their investment performance.
  • Economies of Scale: These firms manage large pools of capital, which allows them to achieve economies of scale. This can result in lower transaction costs, reduced fees, and better access to investment opportunities, which can ultimately benefit investors in terms of potential returns.

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In the blog, we had a brief discussion on investment companies and talked about their ins and outs. In this rapidly advancing era, having an understanding of what an investment company is, can open up a world of opportunities for investors looking to grow their wealth. Whether you’re a seasoned investor or just starting your investment journey, understanding what an investment company is and how it operates can empower you to make informed decisions, grow your wealth, and achieve your financial goals.

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About the Author

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With an MBA in Finance and over 17 years in financial services, Kishore Kumar boasts expertise in program management, business analysis, and change management. Notable roles include tenure at JPMorgan, Nomura, and BNP Paribas. He is recognized for commitment, professionalism, and leadership.