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Retirement Planning: The Fate of Your Mutual Fund November 19, 2008

Posted by retirementwithaplan in Uncategorized.

“Can My Mutual Fund Fail?”

It is sad that these kinds of question are surfacing. The problem (of fund defaults) may come from the numerous layers of management that publicly traded mutual fund families face along with performance expectations by the shareholders of those companies.

Funds fail because of a lack of value perception. Fees don’t seem nearly as high when the fund is performing at its peak. But once those returns are jeopardized, even if, as in the current market it was not your fund manager’s fault, those fees look some much more ominous. And couple that sudden realization with a long market downturn and redemptions skyrocket. After that, the weak (and too expensive) funds fall like dominoes.

Is my money safe?

This answer may seem a little vague but here goes: No, you won’t lose your investment but yes, you may lose your money. Depending on what the fund invested in, how risky those investments were and how well-diversified those investment are, there may be very little left by the time the fund actually fails. What usually happens, in an effort to lose your business altogether, your fund may merge with a similar fund within the fund family or it may actually be purchased by another fund company.

What should you do?

There are several choices. One, you can stand pat as your fund losses value. If you are a long-term investor, this is much easier than if you had simply put the money in the fund either speculatively or used as a holding pattern. If the fund is held in a taxable account, you should watch out for taxes (you must pay if you held the fund during times of capital gain selling – as most have done to pay for exiting shareholders even if you sold it) and make your decision. In a retirement account, you could probably let the plan administrator make the determination of where to put the remaining invested funds.

Secondly, in the future, take the time to explore diversity in your investing, the cost of fees and now, how well the fund manager navigated these brutal times.



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