Fund Bankruptcy?

Michael Sheehan

Physician's Money Digest, March15 2004, Volume 11, Issue 5

The chance that your mutual fundcompany will sink into a sea of red inkis extremely remote. In fact, statistics forlast year show that the mutual fundindustry is making money despite thewidespread scandals over improperfund trading. Even if the unthinkablehappens and your fund company is hitwith so many fines and reparations thatit goes under, the money in the company'sfunds themselves is not at risk. Eachfund is set up as a separate companyowned by the shareholders, so even ifthe XYZ Fund company finds itself in afiscal bind, the money in any XYZ fundsis still out of reach of creditors. Onerisk, however, is that when those whohave shares in your fund head for theexit, it may hurt your returns, as thefund manager is forced to sell stocks atfire sale prices to meet redemptions.Also, as the asset base dwindles, thefund's expense ratio is likely to go up.