The Goals of Chapter 4
       Introduce investment companies ( 投投投投)
        – Functions and different types: unit investment 
          trusts, managed investment companies, other 
          investment organizations
       Introduce various kinds of mutual funds ( 投投投
       投), which are the dominant type of 
       investment companies
       Discuss the costs and taxes of investing in 
       mutual funds 
       Introduce exchange-traded funds (ETFs) ( 投投
       投投投投投投投投投投投投投投)
       Discuss the performance of mutual funds                4-2
          4.1  INVESTMENT COMPANIES
                                                          4-3
                 Investment Companies
         An investment company ( 投投投投) collects 
         money from investors and invest the 
         proceeds in a portfolio of securities on behalf 
         of those investors
          – While investment companies pool the assets for 
            investors, they also sell investors shares, which 
            represent the ownership on this pool of assets
          – Investment companies are financial intermediaries
                Investment companies trade on behalf of their 
                shareholders rather than for their own account
                The net effect of the investment company is to channel 
                household savings to business sectors
          – Existence reason: they provide a mechanism for 
            small investors to “team up” to obtain the benefits 
            of large-scale investment                                       4-4
                 Investment Companies
       The investment company is in essence a legal 
       arrangement for a fund ( 投投 ), i.e., you can 
       treat each fund as an investment company ( 投
       投投投投投投投投投投投)
       Four major functions of investment companies
        1. Administration and record keeping
              Keep track of the position and any income of the 
              portfolio as well as each shareholder
              Send periodic status reports to shareholders
              Reinvest dividends and interest incomes on behalf of 
              shareholders
                                                                         4-5
                 Investment Companies
       2. Achieve diversification ( 投投投投 ) and avoid indivisible 
       problem ( 投投投投投投)
             By polling individual investors’ money, the investment 
             companies can act as large investors, that is, they can 
             invest in a well-diversified portfolio and avoid the indivisible 
             problem of the stock share
       3. Lower transaction costs
             Due to block trading of securities, investment companies 
             could save substantial brokerage fees or bid-asked spreads
       4. Professional management
             Hire security analysts and fund managers to achieve 
             superior investment results for their investors 
               – Find undervalued securities and/or design asset allocation 
                 strategies
             Share research and management costs                            4-6