Handbook of Finance: Financial Markets and Instruments

Chapter 60. Investment Companies

FRANK J. JONES, PhD

Professor, Accounting and Finance Department, San Jose State University and Chairman of the Investment Committee, Salient Wealth Management, LLC

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: Investment companies include open-end mutual funds, closed-end funds, and unit trusts. Shares in investment companies are sold to the public and the proceeds invested in a diversified portfolio of securities. The value of a share of an investment company is called its net asset value. The two types of costs borne by investors in mutual funds are the shareholder sales charge or loads and the annual fund operating expense. Two major advantages of the indirect ownership of securities by investing in mutual funds are (1) risk reduction through diversification, and (2) reduced cost of contracting and processing information because an investor purchases the services of a presumably skilled financial advise at less cost than if the investor directly and individually negotiated with such an adviser. There is a wide-range of investment companies that invest in different asset classes and with different investment objectives.

Keywords: investment companies, open-end funds, mutual funds, closed-end funds, net asset value (NAV), shareholder fee, sales charge, load, commission, expense ratio, unit trust, front-end load, operating expense, expense ratio, management fee, family of funds, investment adviser, ...