Investment Company

An investment company is defined as a corporation or trust involved in the business of investing the combined capital of investors in specific financial securities. Commonly, this is done through one of two kinds of funds: a closed-end fund or an open-end fund (also referred to as a mutual fund).

Investing in different financial instruments like bonds, stocks, and others might offer investors opportunities to grow wealth, expand their financial portfolios and become economically secure. To safeguard their investment and capital, investors can use the services of an investment company. An investment company helps them make prudent financial decisions and develop a potentially lucrative and diversified portfolio. Understanding details about an investment company and how it streamlines the investment process can help you grasp how to use one. Read on.

What is an investment company?

An investment company is an organisation or financial institution that is engaged in the holding, management, and investment of securities. These firms invest the capital of investors in a variety of asset classes and financial securities. An investment company can either be privately owned or publicly held and shares any investor’s losses or profits, according to the investor's share amount.

Investment companies can help investors in many ways, whether investments like mutual fund schemes, stocks, or any other investment instruments are included in a client’s portfolio. Such firms mainly deal with the investment of assets in a given portfolio with the goal of minimising risk for the investor. Most investment companies work in accordance with the regulations of the Reserve Bank of India (RBI) and are registered under the RBI Act (1934).

A client relies on an investment company to maintain holdings in public and private companies and sell them in the market. Typically, any investment company works with different clients/investors and provides them with a range of funds and investment services, such as legal, record keeping, portfolio management, accounting and tax management services. The primary goal of an investment company is to improve clients' financial holdings and enhance their economic strength via trading and portfolio expansion/diversification.

Key takeaways

• An investment company is a specific business that is involved in the investment of combined capital into financial securities.

• Investment firms may be publicly held businesses or private firms, and they deal with the management and operation, sale, and marketing of investment instruments to the public.

• Investment firms make profits through the purchase and sale of different instruments like shares, bonds, property, cash, and other funds and assets.

How does an investment company work?

An investment company gathers resources from various investors and then invests them in different securities and asset classes. Commonly, these firms collect funds from a pool of investors and invest in a variety of assets, including shares and debt-equity. From the investment the firm makes, it earns interest and dividends. Depending on the share of assets of an individual investor, the firm returns the interest and dividends. For example, if an investment company invests ₹50,00,000 and a person invests ₹10,00,000 with this firm, the investor may receive 20% of the amount the company generates in terms of returns.

The assets and securities an investment company invests in depend upon its goals. For instance, they typically prefer investing in equity when the aim is rapid growth, as such assets offer higher returns. If the aim of the investment company is to deliver steady and long-term investment growth while mitigating risk, they might opt to invest in debt securities and real estate investments as they pose limited volatility relative to equity.

Types of investment companies

Investment companies are one of the three types:

1. Open-end investment companies

An open-end fund is essentially a mutual fund which is an investment company that collects capital from several different investors to buy different securities. Mutual funds provide investors with an array of investment options and they can issue an unlimited number of shares of stock through any mutual fund. Investing in mutual funds can significantly diversify an investor’s portfolio and these investment companies work towards achieving such a goal for investors.

2. Closed-end investment companies

Closed-end companies or investment trusts provide investors with a handful of shares trading on the open market. These types of investment companies do not issue any new shares because they sell a set number of shares at a single time and have a higher management fee compared to open-end funds or mutual funds.

3. Unit investment trust or UIT

A unit investment trust or a UIT is an investment company holding an investment portfolio that is fixed and does not issue or redeem new shares. An investment company establishes a UIT to provide investors with a method to invest in a particular industry or sector.

What does an investment company do?

The question, “What is an investment company?” has been answered, but it is crucial to know what an investment company does in terms of its operations and services provided to investors. While it is obvious that an investment company makes different kinds of investments for clients, it offers a lot more in terms of concrete services that make investing a streamlined process for investors.

Portfolio management

Whether clients opt for investment in mutual fund schemes or direct equity instruments, investment companies play the role of portfolio managers that make investment decisions to optimise an investor’s portfolio. Typically, clients and investment companies collaborate to create portfolios that are not potentially risky and contain a diverse set of securities. A portion of an investment company's work deals with balancing clients' financial portfolios and boosting them through passive and active tactics.

Investment strategies

Clients typically prefer an investment portfolio that matches their specific financial plans and goals. Generally, an investment portfolio spread across various assets and securities may result in reduced risk. An investment company works with multiple investors' profiles and can consider investing in private equity to optimise returns and other less risky instruments to mitigate risk.

Assess client's financial goals

Before making any investment decisions, any investment company will provide vital information, such as advice and rationale about how much the client should invest and the duration of investment. These companies constantly interact with their clients in an effort to learn how much a client is prepared to risk. Knowing such information is critical for ensuring that these companies fulfil the client's financial objectives.

Investment assistance

After learning about a client’s unique financial goals, investment horizon, and risk profile, an investment company will recommend certain investment instruments and options for the client’s investment requirements. The company may focus on stock, debt securities, bonds and even precious metals, such as diamonds and gold for investment purposes. Depending on how clients make agreements with investment companies, firms may make investment decisions themselves, or seek permission from clients to do so.

Legal and tax assistance

Typically, an investment company offers legal and tax assistance for clients, to prevent confusion. Tax assistance aids clients in understanding their legal status and ensures they make appropriate investment decisions that prevent legal issues. Additionally, an investment company may help a client to file tax returns using their investment resources.

Benefits of investing with an investment company

One of the main advantages of investing with an investment firm is the professional service offered to existing investors who wish to enhance a financial portfolio and new investors who are just entering the investment landscape with limited experience and knowledge. Here are the key benefits you get from investment companies:

Capital cost and allocation

You may believe that you can copy the portfolio of any investment company and reap the benefits, but you would face issues that investment companies can resolve quickly. Issues faced by individuals who are not well-versed with investments take the form of trading costs and a lack of access to several unlisted companies.

For every investment you opt for, or trade you make, there will be costs incurred by you. To a large extent, these are fixed costs. However, because an investment company trades and makes investments on a large scale, it has the advantage of minimising costs and therefore, giving clients the benefit of this.

Furthermore, the access to unlisted companies that an investment company enjoys and the investment channels and processes as a result of this, may not be available to regular retail investors acting alone. For instance, an investment company may invest in the stock of an unlisted company that may require a minimum threshold of investment that exceeds your capital.

Safeguard against hidden risks

Any investment, except for certain fixed income instruments, comes with an inherent risk. Some risks may be apparent and some may not be so obvious. Investment companies have the expertise to detect risks and provide ways to mitigate them. For example, investment companies will better grasp the hidden risks of investing in businesses that follow seasonal cycles due to their professional skill.

Professional judgement

Investment management firms execute calculated strategies based on your securities/assets and help you invest in a secure domain. They weed out dubious sources of investment that you may not be able to determine on your own.

Asset management

An investment company gives you a benefit by handling your securities/assets on your behalf. They are responsible for overseeing the flow of your investments and financial statements with the aim of carefully planning your financial road map. Consequently, this helps create a prospective investment portfolio to gain long-term returns while maintaining liquidity. Liquidity helps you in times of emergencies and unwanted surprises.

Secure investment

If you are new to the world of investing in the securities markets like the stock market, bonds, or other financial markets, chances are you might become a victim of fraud. An investment company safeguards you from malpractice in your investment, making sure your money is secure.

Transparency

An investment company not only provides you with security in terms of transactions and investments, it also maintains transparency in its operations. Your records are monitored on your behalf and investments tracked to evaluate the progress of your portfolio. Regular reports are given to investors and all records are kept transparent to enhance the safety aspect of investment.

Why park your funds with an investment company?

The current economic scenario in India offers you fixed income instruments and other investments to grow your wealth. However, bank interest rates on fixed deposits being at an all-time low, your means of earning a regular income appears bleak. What’s more, interest rates do not account for inflation, and this makes it more of a challenge to earn enough to meet your financial requirements from such investment sources.

This is where an investment company comes into the picture. To provide you with a hedge to combat inflation, investment managers use their abilities and experience to invest pooled resources in the most promising financial instruments.

Additionally, investors who lack the time and effort to track their investments actively can rely on investment companies to handle their funds.

How does an investment company protect investment during a crisis?

An investment company takes shape when you know that it has proficient financial managers to help you through good financial times and bad. Investment company managers get you on the right track where your investments are concerned, letting you avoid hasty and impulsive investment decisions in times of economic downturn. Helping you to set clear and measurable financial objectives, investment companies determine portfolio risks and alter your investments to lessen risk. With expertise at portfolio diversification, investment managers aid you in navigating risk in such a way that your financial portfolio remains solid through periods of inflation, market failure, or economic downturns.

Conclusion

In the challenging times we live in, financial independence is of the essence and growing wealth is a necessary condition. Through traditional methods of building wealth, you may find that you cannot build the corpus you require to meet ever-challenging financial milestones in your life. An investment company can help you allocate your capital to potentially grow your wealth and mitigate risk. Through portfolio diversification, you can sit back and let experts manage your wealth and see it potentially grow for your future needs.

A large part of investing can be done by investors themselves, and the Bajaj Finserv Mutual Fund Platform may be the right place to begin your investment journey. With more than 1000 funds on offer, you can find one that suits your financial goals and circumstances. Don’t waste another minute and invest today to see your wealth grow!