Diversified investment companies are unit investment trusts or mutual funds that are structured to allow investment in a wide range of securities and various types of businesses. In the case of a mutual fund, the diversified investment company can be a closed fund or an open-ended fund. In the United States, there are specific regulations that govern how much of any given investment can be held by a diversified investment company.
The main law or regulation that defines the function of a diversified investment company is known as the Investment Company of 1940. This Act effectively defines maximum percentages on the assets that make up 75% of the overall portfolio owned by the mutual fund or the unit investment trust. This 75% of assets include cash, cash equivalents, and securities. Out of this portion of the portfolio, the diversified investment company cannot have more than 5% of the assets associated with the securities of any one issuer. At the same time, the investment company cannot control more than 10% of the voting shares that are associated with any one issuer.
These provisions effectively make it impossible for the diversified investment company to place a large concentration of its assets into an investment strategy focusing on any one security or any group of securities associated with the same issuer. Doing so helps to insulate the investment company from being seriously crippled financially in the event that one of the investments suddenly drops in value. Because the portfolio of the diversified investment company is so varied in nature, the chances of sustaining enough losses overall and placing the trust or mutual fund in danger are greatly reduced.
Investors who work with mutual funds or unit investment trusts can enjoy a slightly higher degree of security when dealing with a diversified investment company. While the usual degrees of volatility on each individual holding are still present, the expanse of so many different investments helps to ensure that if one investment is currently losing money, other investments are increasing in value at the same time. This creates a situation where the investor can still reasonably anticipate achieving a net increase, despite the poor performance of one of the investments held by the company.
