The govt is guaranteeing the market funds value.

But how are they normally protected? I know value fluctuates.
What happens if a fund company goes under?

Is it protected by SIPC, like the accounts are?

 

  • digdowndeepnseattle 4:55 pm on August 17, 2010

    First you have to understand what a mutual fund is…it’s a collection of invested dollars that are in turned used to buy stocks according to a certain investment profile. The value of the fund is the value of the shares less fees that the mutual fund charges for that day. That’s how the company makes money….the fees they charge. No money or assets of the mutual fund are lent to or borrowed by the mutual fund company. They are kept 100% seperate. Lastly, they are not considered part of the assets of the company. If a mutual fund was invested in mortgage securities the only thing would happen is that the fund would lose money. If it were 100% invested in mortgage securities then market value might go to zero but that’s life. Assumption is that you knew the risk of that when you invested your money in that fund. If the fund company goes under it has zero impact on the mutual fund itself unless the mutual fund is invested in the fund company but there are rules against that.

    That’s where they differ from banking institutions. Banks can borrow the assets of the depositers and in exchange pay them a certain amount of interest. Thus, if they borrow the depositers money they have to earn a higher rate of interest in their investments than they pay back to the depositers…the larger the difference the more profit they make. Of course they also charge fees but that’s not what gets them into trouble. They get into trouble when they borrow lenders money and invest it into mortgage loans that sour. They then still OWE the depositors but they don’t have the cash to pay them back. That’s how the bank goes under. They owe the depositers more money than the investments are worth. At this point the FDIC will step in and take over the bank.

    If a person at the brokerage firm or mutual fund company walks off with your cash instead of investing it then the SIPC will step in with insurance payments but they will not insure losses due to market fluctuation.

    The govt guaranteeing money market values is entirely different…they feel they have to do this because if they don’t then they have to admit that a dollar is not really worth a dollar….remember-every money market’s value is always $1.

  • beancounter 4:55 pm on August 17, 2010

    SIPC does cover mutual funds. Let’s say you have a Fidelity account that holds Vanguard funds. If either Fidelity or Vanguard goes under, you’ll still own your portion of the stocks in the mutual fund. The mutual fund might be transferred to new management or it might be dissolved. If it’s dissolved you’d get your market value back.

    By law financial companies need to keep client funds separate from company funds. You’ll still be exposed to market risk but you’ll always own your stocks. (Or portions of them through a mutual fund.) SIPC protects against theft/fraud up to 500K.

  • src50 4:55 pm on August 17, 2010

    SIPC protects the assets against loss due to the mutual fund co./brokerage bankruptcy or malfeasance. It does not protect against market losses.

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