CHAPTER 20

INDIRECTINVESTIN
G
INDIRECT
INVESTING
Indirect investment refers to investing in assets through
intermediaries or pooled funds, rather than directly owning
the assets yourself. In this approach, investors do not
directly control or manage the underlying investments, but
they benefit from their performance.
• Mutual Funds
Investors pool money to buy a diversified portfolio of
stocks, bonds, or other assets.
• Exchange-Traded Funds (ETFs)
Traded like stocks, but represent a basket of underlying
assets.
• Pension Funds
Retirement savings invested on behalf of individuals in
various financial instruments.
• Real Estate Investment Trusts (REITs)
Invest in income-producing real estate properties;
investors earn returns from rents and property gains.
• Hedge Funds / Private Equity Funds
Specialized pooled investment vehicles, typically for high-
net-worth individuals or institutions.
 Advantages of Indirect
Investment
Diversification
Professional
management Lower
entry costs
Easier to access
global markets
Disadvantages
Management fees
Less control over individual assets
Performance depends on fund
What is investment company

An investment company is a financial institution that pools

funds from investors and uses that capital to buy a diversified
portfolio of securities such as stocks, bonds, real estate, or
other assets. These companies provide professional
management and allow investors to gain exposure to a
variety of investments without having to manage them
individually.
Vanguard
BlackRock
(iShares) Fidelity
Franklin
Templeton
 Key Features of an Investment
Company:

Pools money from multiple

investors Invests in a wide range of
assets Managed by professional
fund managers
Offers diversification and risk
management
Regulated by financial authorities
(e.g., SEC in the U.S.)
Types of Investment Companies

1. Unit Investment Trusts

2. Closed-End Investment Companies
3. Open-End Investment Companies
(Mutual Funds):
1. United investment
trust
A United Investment Trust typically refers to a specific type of Unit
Investment Trust (UIT), often associated with investment products
offered under the brand United by financial institutions or firms like
United Bank, United Trust, or U.S. Bank. However, there is no single
globally recognized entity officially called “United Investment Trust.” So,
the term may refer to a type of investment product offered under a
“United” brand name or simply a Unit Investment Trust (UIT) with
“United” in the name.
 Understanding Unit Investment Trusts (UITs)
A Unit Investment Trust (UIT) is a type of investment
company that:

Issues units to investors

Holds a fixed portfolio of securities (stocks,

bonds, etc.) Has a defined lifespan (often 1 to 5

years)
 Key Features of
a UIT Fixed
Portfolio
The investments
are selected at the
beginning and rarely
change.
Defined Term
The trust dissolves at a set maturity date, and
proceeds are paid out.
Transparency
Investors know what securities are in the trust.
Distributions
2. Closed-End Investment
Companies
A closed-end investment company, also known as a closed-end
fund (CEF), is a type of investment company that raises a fixed
amount of capital through an initial public offering (IPO) and then
lists its shares on a stock exchange for public trading.
Unlike mutual funds, closed-end funds do not issue or redeem
shares on a continuous basis. Instead, they trade like stocks and their
prices fluctuate based on market demand and supply, not just the
underlying asset value.
 Key Features of Closed-End Investment
Companies Fixed Capital
A set number of shares are issued and traded
on an exchange.
Exchange-Traded
Shares trade on stock exchanges like NYSE or
NASDAQ.
Market Price
Shares may trade at a premium or discount to Net
Asset Value (NAV).
Professional Management
Assets are managed by fund managers for income
or capital gains.
 Advantages of Closed-End Funds
Access to professional management
Diversification across sectors or asset
classes Potential for income through
dividends or interest
Can trade at a discount (opportunity to buy
below NAV)
Disadvantages
Price can be volatile due to market
supply/demand May trade below NAV
(discount) for long periods
Management fees and leverage risk (some CEFs use
3.Open-End Investment
Companies (Mutual Funds)
An open-end investment company, commonly known as a
mutual fund, is a type of investment vehicle that pools
money from many investors to buy a diversified portfolio of
stocks, bonds, or other securities. These funds are
continuously open to buying and selling shares based on
the current Net Asset Value (NAV).
 Key Features of Open-End
(Mutual) Funds Continuous
Issuance
New shares are created when investors buy in; redeemed
sell. investors
when
Priced at
NAV
Shares are bought or sold at the Net Asset Value calculated at
each trading
the end of day.
Diversified Portfolio
Invest in a mix of securities to
reduce risk.
Professional
Managed by fundManagement
managers who make investment decisions
investors.
on behalf of
Liquidity
Can be redeemed at NAV on any
business day.
 Advantages of Open-End Funds:
Diversification: Reduces exposure to any one asset.
Affordability: Low minimum investment required.
Accessibility: Easy to buy/sell through brokers or fund
companies.
Transparency: Regular updates on holdings and
performance.
Regulated: Governed by financial authorities (e.g., SEC in
the U.S.).
Disadvantages
Management Fees: Actively managed funds charge
fees (expense ratio).
Price Uncertainty: Can only buy/sell at end-of-day NAV.
 Types of Mutual Funds

1.Equity Funds – Invest in stocks (growth, value, or sector-

specific).

2.Bond Funds – Invest in government, municipal, or corporate

bonds.

3.Balanced Funds – Mix of stocks and bonds for moderate risk.

4.Money Market Funds – Invest in short-term, low-risk

instruments.

5.Index Funds – Track a market index like the SCP 500.

6.International/Global Funds – Invest in companies outside

the investor’s
Investment company performance

Investment company performance refers to how well an investment

company or its managed funds (e.g., mutual funds, ETFs, closed
-end funds) have achieved their financial goals, typically measured

by returns, risk, and efficiency over a given time period.

Indicators of Strong Performance

Consistent returns above benchmark indexes (e.g.,

SCP 500) Low volatility relative to peers

Good risk-adjusted metrics (Sharpe ratio, alpha)

Reasonable fees and expenses

Transparent, experienced fund management

THE END