Tax status of the industry

investment companies have a highly favorable tax situation. provided they conform to certain rules to qualify as an investment company, they do not pay federal taxes on income generated by their security holdings. however, no less than half their resources must be devoted to securities and cash assets. Investment companies must maintain a highly diversified portfolio-a maximum of one quarter of their total resources can be devoted to securities issued by any single firm. Only a small portion of their net income (no more than 10 percent) can be retained in the business. the rest must be distributed to the shareholders.