Bright Notion

Taxation of the profits of investment companies is of a special nature. Internal revenue law is so written that those companies which are willing to register as “regulated” investment companies and which agree to distribute at least 90 per cent of their received dividends and interest will be entitled to exemption from taxation on such income and any capital gains paid out to shareholders.

However, any other retained income must be taxed at ordinary corporation rates. The company must report to its shareholders the nature of payments to them (interest and/or capital gains) and these will be taxed when received by the investor according to his particular tax bracket.

Although it is a good business opportunity, the performance of the investment companies would be subjected to various degrees of criticism is not difficult to understand. Such a diversity of funds, each trying to achieve certain objectives and not all being uniformly successful may mean that the failures undoubtedly become magnified without taking into consideration the degree of risk involved.

Investment companies will involve a degree of risk which is commensurate with the type of portfolio they set up and the relative success or failure of the management to achieve their stated objectives; this is not much different from an individual’s successes or failures.

The main differences between this and other business opportunities seem to be that the purchaser of the investment company shares seems to feel that he is buying management services and that, therefore, such a management cannot make a mistake! Unfortunately, we are all human and mistakes may even be made by a board of directors as well as an individual.

Another strong criticism which is frequently heard is that the performance of a fund is no better than an individual investor’s would be if he is well informed and his sense of timing is good. Comparison of fund performance with various stock indexes, such as the Standard & Poor, have been made and have shown striking results in the case of some funds and rather mediocre performances for others.

Investigations have also been made in order to appraise the management, since this is the most important matter requiring some sort of yardstick.

The main point, however, is usually overlooked: the fact is that the neophyte investor is not so well informed as he should be, nor has he relatively large funds at his disposal; consequently, his participation in one of the investment companies may well be justified; and if the management produces results, he will be well paid for the initial loading charge.

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