American Funds: Regulated Investment Company?

American Funds is a subsidiary of Capital Group, which has been in operation since 1931. The company offers a range of investment options, including mutual funds, portfolio funds, and target funds. One of its funds, The Investment Company of America, has been in operation since 1934 and primarily focuses on American holdings, with 86% of its assets in U.S. equities. With such a large presence in the investment market, it is important to understand if American Funds is a regulated investment company (RIC). A RIC is qualified by the Internal Revenue Service (IRS) to pass through taxes for capital gains, dividends, or interest earned directly to individual investors, avoiding double taxation. So, is American Funds a regulated investment company?

American Funds Investment Company of America (AIVSX)

The American Funds Investment Company of America (AIVSX) is a large-blend stock fund that was first launched in 1934. It is a subsidiary of Capital Group, which has been helping investors pursue long-term investment success since 1931.

AIVSX seeks to provide a combination of growth and income to investors, with a focus on long-term capital growth and future income. It invests primarily in larger, well-established companies that represent a wide cross-section of the US economy. AIVSX has an 80-plus-year track record and maintains a three-star Morningstar rating.

As of May 2023, its total asset under management (AUM) was $110.45 billion, with 75% of its portfolio invested in large-cap stocks and 86% in US equities. The fund's top two sectors are information technology and healthcare, comprising 18.6% and 14% of the fund's net assets, respectively.

AIVSX has a low expense ratio of 0.58% and typically distributes dividends in March, June, September, and December. Its longest-tenured managers, James Lovelace and Donald O'Neal, have been managing the fund for nearly three decades and are accompanied by seven other fund managers.

As of May 31, 2023, AIVSX had generated an average annualised return of 10.48% over the last 10 years and a one-year return of 4.57%. Since its inception, the fund has generated an annualised return of 11.95%.

American Funds' investment options

American Funds, a subsidiary of Capital Group, offers a wide range of investment options, including traditional mutual funds, portfolio funds, and target funds. The company has been in operation since 1931, providing investment services to help investors meet their financial goals.

Traditional Mutual Funds

American Funds offers dozens of traditional mutual funds, which can be tailored to meet specific preferences and needs. These funds cover a spectrum of investment objectives, levels of volatility, and asset types.

Growth-and-Income Funds

These funds seek to increase capital in the long term by investing in growth-oriented companies. They aim to provide a combination of growth and income, with a focus on future income over high current yield.

Tax-Exempt Bond Funds

These funds seek to provide tax-exempt interest through investments in municipal bonds.

Equity-Income Funds

These funds primarily invest in dividend-paying stocks and bonds, with an emphasis on income rather than growth. As a result, they tend to produce lower returns than growth funds during strong stock market performances.

Balanced Funds

Balanced funds invest in a combination of stocks, bonds, and cash-equivalent investments, aiming for growth in both capital and income. They tend to generate more income than growth funds, providing a cushion during stock market downturns.

Bond Funds

Bond funds are designed to provide regular income from the interest paid by the bonds they hold. They are a stable investment option, helping investors weather stock market downturns.

Capital-Preservation Funds

These funds focus on preserving capital by investing in short-term, low-risk securities such as U.S. Treasury bills and certificates of deposit.

Target Date Funds

Target date funds are tailored to an investor's anticipated retirement date. As the target date approaches, the fund's strategy shifts from growth to income generation.

Portfolio Funds

These funds are "funds of funds," investing in other mutual funds rather than individual securities. They are designed to provide diversification and consistent results.

American Funds also offers 401(k) retirement plans, allowing employees to contribute pre-tax or post-tax (Roth) contributions. These plans provide flexibility, with various investment options and distribution choices when employment ends.

Requirements to qualify as a Regulated Investment Company (RIC)

To qualify as a Regulated Investment Company (RIC), several requirements must be met. Firstly, the business must exist as a corporation or other entity that would typically be taxed as a corporation. Secondly, it must be registered as an investment company with the Securities and Exchange Commission (SEC). Thirdly, it must elect to be treated as a RIC under the Investment Company Act of 1940, provided that its income source and asset diversification meet the specified requirements.

Additionally, a RIC must derive a minimum of 90% of its income from capital gains, interest, or dividends earned on investments. This includes dividends, interest, payments from securities loans, gains from the sale or disposition of stocks, securities, or foreign currencies, and other income related to its investing business. It is important to note that losses from the sale or disposition of stocks or securities are not considered in the gross income computation.

To maintain its status as a RIC, the company must also distribute at least 90% of its net investment income to its shareholders in the form of interest, dividends, or capital gains. If the RIC fails to distribute this income, it may be subject to an excise tax by the IRS and will need to issue an IRS Form 2439 to shareholders.

Furthermore, to qualify and maintain RIC status, specific diversification requirements must be met. At least 50% of the company's total assets must be in the form of cash, cash equivalents, or securities. Additionally, no more than 25% of the company's total assets can be invested in securities of a single issuer, unless they are government securities or securities of other RICs.

By meeting these requirements, a company can qualify and maintain its status as a Regulated Investment Company, allowing it to pass through income to its individual investors without being taxed on its earnings.

RIC tax treatment

RIC stands for Regulated Investment Company. A domestic corporation can elect to be treated as a RIC for a taxable year if it satisfies certain requirements relating to the source of its income and the diversification of its assets.

A RIC that satisfies certain additional distribution requirements will generally be taxed as a pass-through entity that acts as a partial "conduit" of income to its shareholders. This means that qualifying RICs can deduct the amount of dividends paid to their shareholders when computing their taxable income and gains. As a result, the RIC's distributed net income and gains can be passed through to its shareholders tax-free at the RIC level.

To qualify as a RIC, a company must meet the following requirements:

• At least 90% of its gross income must be derived from interest, payments with respect to securities loans, gains from the sale or disposition of stocks, securities, or foreign currencies, other income derived from its business of investing in such stocks, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership.
• At the end of each quarter of the tax year, at least 50% of the value of its assets must be invested in cash and cash items, government securities, securities of other RICs, and securities of other issuers (with some restrictions on investments in a single issuer).
• At the end of each quarter, no more than 25% of the value of its assets can be invested in the securities of a single issuer, two or more issuers controlled by the RIC and engaged in related trades or businesses, or one or more qualified publicly traded partnerships.

In addition to the above requirements, a RIC must also meet distribution requirements, which include the following:

• The RIC's deduction for dividends paid for the tax year must equal or exceed 90% of its investment company taxable income and 90% of the excess of its interest income excludable from gross income over its disallowed deductions.
• If a RIC does not satisfy the distribution requirements, it will generally be subject to taxation as a C corporation.

There are also specific instructions and forms that a RIC must follow and file for tax reporting and compliance, such as Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies.

American Funds' history

American Funds, a subsidiary of Capital Group, was founded in 1931 and has been helping investors pursue long-term investment success ever since. The company offers a range of investment options to help investors meet their financial needs, including managed equity and fixed-income mutual funds designed with a long-term focus.

The Investment Company of America (AIVSX), one of American Funds' offerings, was launched in 1934 and is a large-blend stock fund. It primarily focuses on American holdings, with 86% of its assets in U.S. equities as of May 2023. The fund has a low expense ratio of 0.58% and has generated an average annualised return of 10.48% over the last 10 years as of May 31, 2023.

American Funds offers dozens of traditional mutual funds, as well as a large selection of portfolio and target funds. The portfolio and target funds are all “funds of funds,” as they invest in traditional mutual funds rather than individual securities.

Capital Group, the parent company of American Funds, is known for its emphasis on capital preservation and consistent long-term performance. The firm combines individual accountability with teamwork, allowing managers and analysts assigned to a portfolio to work together to research and share information about potential investments.

With over 93 years of experience and more than $2.7 trillion in assets under management as of June 30, 2024, American Funds, through its parent company Capital Group, has established itself as a prominent player in the investment industry.

Frequently asked questions