OCTOBER 27, 2024
RUSHIL PATEL
Last Edited:
OCTOBER 27, 2024
3 Minutes
Hi Everyone!
Welcome to the seventh edition of Phron Weekly! This week's review explores liberation and tax laws for regulated investment companies.
“Birds born in a cage think flying is an illness.” - Alejandro Jodorowsky
Alejandro Jodorowsky is a Chilean-French filmmaker, writer, and artist. He is known for exploring themes of liberation and self-discovery. His artistic career spanned several decades, beginning in the 1940s. Jodorowsky is also known for his philosophy of 'psychomagic,' which involves using symbolic actions to heal psychological wounds.
While this quote is not definitively documented, it aligns with his reflections on human conditioning and the need to break free from mental and societal limitations.
Jodorowsky's quote suggests that we grow up within a certain confined environment and can be so accustomed to our limitations that we perceive freedom, or anything outside our normal experience, as something dangerous. “Birds” represent individuals constrained by mental or societal barriers, and “flying” symbolizes liberation, opportunities, or new ways of thinking.
Oftentimes, we become so accustomed to social structures or cultural norms that we struggle to see things from another perspective, thus limiting individual potential. Or, we may have a close friend or family member project their disapproval of our 'flying' outside of their 'cage' onto us.
This week, consider what you are afraid of losing. How does this fear function in your life?
As the stock market rallies, large investment funds are forced to offload shares to avoid trouble with the Internal Revenue Service (IRS).
A Regulated Investment Company (RIC) is a type of investment firm that is structured under the U.S. tax code to avoid double taxation on earnings. To qualify as a RIC, the company must distribute at least 90% of its income to shareholders. RICs are qualified to pass-through income enabling them to be taxed only at the shareholder level, avoiding corporate taxes. The concept of pass-through income is referred to as conduit theory. Most mutual funds and exchange-traded funds (ETFs) are structured as RICs.
The IRS has specific rules for RICs, including the limitation that no more than 50% of the portfolio can consist of large holdings. A large holding is defined as any position that accounts for more than 5% of the RIC's total assets. This rule ensures diversification and prevents concentrated risk within a single company or sector. Therefore, with the recent rally in tech stocks, we see a rise in large holdings within large investment funds. While RICs are not immediately penalized for the growth of existing shares, once they have passed the threshold, they cannot add to the large holdings and must rebalance their portfolio.
The regulations for RICs exist primarily to protect investors by promoting diversification and risk mitigation. Additionally, this regulation also encourages responsible investment strategies. The requirement to distribute income to shareholders ensures that profits flow directly to investors rather than being reinvested or retained within the company, which would lead to tax inefficiencies.
Some action steps for you:
Some links for you:
Fun Fact: Did you know that Pokémon holds the title of the largest media franchise in the world? Valued at over $100 billion, it surpasses the gross revenue of other media franchises, including Marvel, Star Wars, Mario, and Mickey Mouse.
Disclaimer: The content of this newsletter is for informational purposes only and does not constitute professional advice.
Created by Rushil Patel 2024 ©