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Investment Companies

Investment Companies

31.03.2021

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An investment company is an organization that makes collective investments.

The main functions of investment companies are diversification of investments and management of an investment portfolio, which includes securities of different issuers and other types of stock instruments. In accordance with the situation, these financial intermediaries carry out the purchase and sale of securities, redistributing capital to promising industries and enterprises.

In the Russian context, the phrase “investment company” often denotes a legal entity that has a license from the Bank of Russia to conduct at least brokerage and/or dealer operations. If such a legal entity is also a credit institution at the same time, that is, it has the appropriate licenses of the Central Bank of the Russian Federation, then such a legal entity is called in the Russian tradition – an investment bank.

Investment companies are represented by holding companies, financial groups, financial companies.

A distinction is made between closed-type investment companies, which have a fixed capital structure, and open-type investment companies, which change the capital structure through periodic issuance of shares.

An investment company is a collective investment organization.

An investment fund is a collective investment institution.

Do you feel the difference? Me not. Yes, the difference is that a company is an organization and a foundation is an institution. But for a non-lawyer, there is not much difference.

Organization – an association of people and resources, created to perform certain tasks, to meet the interests and needs of people. The distribution of roles and responsibilities can be both formal and informal. Organizations operating in the field of economic and political activity require mandatory registration. At the same time, some informal associations (artists’ unions, interest groups) can operate completely free on the basis of voluntary participation.

Institution – a non-profit legal entity created to solve social, managerial, cultural, and other tasks at the expense of the owner. In other words, this person is not aimed at making a profit and exists at the expense of sponsorship or subsidies. The owner can be absolutely any subject of legal relations (natural or legal person, state, city, etc.).

What happens? The concept of “organization” is broader. It includes state, municipal, public legal entities, including an institution. They can be sports, military, cultural, educational. A significant part of organizations either conduct commercial activities or have such a right. The institution is always a non-profit legal entity that is not aimed at making a profit. It is maintained by the owner (natural or legal person) who covers all expenses.

The institution always operates on a legal basis. With regard to organizations, they can also be illegal (criminal, terrorist, religiously destructive). The institution must be registered in the prescribed manner. Its creators prepare a charter, which is approved by their common decision. An organization can also be registered. But in the developed world, formal consolidation of the association is not necessary, since, otherwise, it violates basic human rights and freedoms. As a last resort, the notification procedure works.

It became a little clearer. But let’s explore the details …

Investment companies

When talking about investment companies, it is generally accepted to assume such an organizational form as a corporation. It includes an investment fund and a company that manages the fund.

Investment companies as corporations can be of two types:

The investment company has its own management apparatus.

In this case, the founders and the manager are participants in the investment fund. Such investment companies are called Management Investment Companies or Self-Managed IC

The management company is external to the investment fund.

In this case, a special company is hired to manage the investment fund – a management company. Such investment companies are called Managed Investment Companies.

However, in addition to corporations, there are other types of investment companies that differ not only in their structure but also in the nature of investing and attracting investor funds.

Types of investment companies

In the US legislation, as in the most developed legislation on this topic, investment companies are divided into three categories:

It is better to perceive the names of categories of companies in English, because after translation into Russian, subconsciously, the brain of a Russian-speaking person puts a meaning different from the English version into the phrase that forms the name of the category.

  1. Face-amount Certificate Companies – companies that issue certificates of placement, which entitle the holder to either receive a fixed income in a timely manner or demand the redemption of the certificate in a specified time. The nature of the relationship “company – investor” is very similar to the process of lending to a company in a bank. Only this method allows the company to attract cheaper financing than a bank loan.

An investment company turns to investors and asks to finance its activities on the stock market, for which it guarantees a fixed percentage (for example, 5-10% per year) by issuing debt obligations. The risk for investors is low since the guarantees of payments are the property of the investment company (real estate and other assets).

  1. Unit Investment Trusts – investment companies that sell shares (units; shares) in relation to a permanent investment portfolio, consisting of bonds or stocks. Shares of trusts have a limited circulation period, upon the occurrence of which they are canceled or sold. In this case, the proceeds are distributed among the holders of the shares. Therefore, it is convenient to form trusts from bonds with their constant coupon yield and payment of par value at maturity. If the investment trust is formed of shares, then upon the date of liquidation of the fund, all shares in its portfolio are sold, and the proceeds are distributed among the shareholders.

Shares of trusts are purchased through brokerage firms establishing the trust or through brokers acting as agents. If you do not want to wait for the liquidation of the trust, you can sell your shares to the founder of the trust. Since portfolio management is practically not carried out, such investment companies are called Non-managed Investment Companies. Thus, this category of investment companies, in fact, is a closed-end fund (Closed-end Funds), but in fact, it is an investment company of an unmanaged type.

  1. Management Companies – All investment companies other than certificate issuing companies or unit trusts are considered Management Companies. Management Companies issue securities (certificates, shares, shares) that have a legal nature of shares, which most often represent a share in assets, which may vary depending on the results of the company’s investment policy. Less commonly, Management Companies’ securities correspond to debt obligations giving investors the right to receive a fixed income.

These investment companies are formed in the form of a corporation.

Management Companies can be understood as Investment Advisors and, in particular, Portfolio Managers. Both are not investment companies, they are institutions or individual agents in the stock market that provide services for managing the assets of investment funds or funds of individual investors.

Management Companies are divided into so-called Open-ended Companies and Close-ended Companies. Private companies do not issue reversible securities, resorting from time to time, like ordinary entrepreneurial corporations, to the public offering of their securities, which are traded on the secondary market.

Principles and functions of investment companies

In order for the investors of investment companies to receive stable profits, their investments are pooled and invested in various projects. Profit is generated not only through pooling funds but also in connection with the competent actions of the financial manager. At its core, the activity of an investment company is the activity of a financial intermediary.

The following 3 functions can be distinguished that are performed by investment companies or three activities on which investment companies earn:

Operations for the purchase and sale of securities. Or, in simple words, speculation in the securities market.

Operations for the distribution of capital in different directions in order to reduce risks. Or in other words, investing in dynamic companies and startups.

Issuance of their securities and “managed” trading on the stock market.

The services of investment companies are available to various investors, both large and small. And the income that the investor will receive depends on the successful or unsuccessful investment of funds. Companies themselves receive commissions on profits and% for managing deposits.

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