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Investment Companies

Mutual Funds, Closed-End Funds, UITs

Generally, an "investment company" is a company (corporation, business trust, partnership, or limited liability company) that issues securities and is primarily engaged in the business of investing in securities.

An investment company invests the money it receives from investors on a collective basis, and each investor shares in the profits and losses in proportion to the investor's interest in the investment company. The performance of the investment company will be based on (but it won't be identical to) the performance of the securities and other assets that the investment company owns.

The federal securities laws categorize investment companies into three basic types:

  • Mutual funds (legally known as open-end companies);

  • Closed-end funds (legally known as closed-end companies);

  • UITs (legally known as unit investment trusts)

Each type has its own unique features. For example, mutual fund and UIT shares are "redeemable" (meaning that when investors want to sell their shares, they sell them back to the fund or trust, or to a broker acting for the fund or trust, at their approximate net asset value). Closed-end fund shares, on the other hand, generally are not redeemable. Instead, when closed-end fund investors want to sell their shares, they generally sell them to other investors on the secondary market, at a price determined by the market. In addition, there are variations within each type of investment company, such as stock funds, bond funds, money market funds, index funds, interval funds, and exchange-traded funds (ETFs).

Some types of companies that might initially appear to be investment companies may actually be excluded under the federal securities laws. For example, private investment funds with no more than 100 investors and private investment funds whose investors each have a substantial amount of investment assets are not considered to be investment companies—even though they issue securities and are primarily engaged in the business of investing in securities. This may be because of the private nature of their offerings or the financial means and sophistication of their investors. For additional information on these types of private investment funds, please refer to Hedge Funds in our Fast Answers databank.

Before purchasing shares of an investment company, you should carefully read all of a fund's available information, including its prospectus and most recent shareholder report.

Investment companies are regulated primarily under the Investment Company Act of 1940 and the rules and registration forms adopted under that Act. Investment companies are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. For the definition of "investment company," you should refer to Section 3 of the Investment Company Act of 1940 and the rules under that section.


 
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