Goals and Earnings of Investment Companies

Investment companies adopt many different goal. Growth funds are interested primarily in long-term capital appreciation and tend to invest mainly in common stocks offering strong growth potential. income funds stress current income in their portfolio choices rater than growth of capital, and they typically purchase stocks and bonds paying high dividends and interest. balanced funds attempt to bridge the gap between growth and income, acquiring bonds, preferred stock,and common stock which offer both capital gain (growth) and adequate current income. On average, balanced funds place about two thirds of their resources in stocks and about one third in bonds.
the majority of investment companies give priority to growth in capital over current income due to the tax advantages of capital gains to their investors. However, the industry‘s growth in recent years has centered primarily in funds which stress current income. Prominent examples include bond funds, money market funds, and option income funds (which issue option against a portfolio of common stocks). while most investment companies hold a highly diversified portfolio of securities, a few specialize in stocks or bonds from a single industry or sector (such as precious metals or oil and natural gas).
It is not at all clear that investment companies hold a significant advantage over other investors in seeking out the highest returns available in the financial marketplace. Moreover, there is evidence that these companies may roll over their portfolios too rapidly, which runs up the cost of managing the fund and reduces net earnings. Less-frequent trading activity on the part of investment companies might well result in greater long-run benefits for the saver.Research evidence has been mounting for a number of years that security markets are highly efficient. overvaluation or undervaluation of securities is, at most, a temporary phenomenon. In this kind of environment it is doubtful that investment companies are of significant benefit to the large investor, though they may indeed aid the small investor in reducing information and transactions costs and opening up investment opportunities not otherwise available.