If you’re used to investing your money in a bank through certificates of deposit or money markets accounts, you may have taken comfort from knowing that your investments were insured by the Federal Deposit Insurance Corporation. The FDIC does not insure mutual funds. There’s no guarantee you won’t lose money, and in certain extreme circumstances you could lose all your money. Learn how mutual funds work before you invest.
Complete Loss Scenarios
There are a few catastrophic events that could cause you to lose all your money in a mutual fund. Because funds invest in a wide variety of stocks, bonds and commodities, it’s unlikely that every single company the fund invests in would fail. However, the economy could fail. That could make every investment worthless. Another possibility is that a manager at a mutual fund could be dishonest and get caught embezzling. Investors would quickly lose confidence in such a mutual fund and get out of it. This could drive the share price near zero. Finally, a fund could simply be mismanaged and run out of money. In such a case, no one would guarantee the value of your shares.
Securities Investor Protection Corporation
The SIPC guarantees that you can redeem your shares in a mutual fund. The catch is it won’t guarantee the value of those shares. If investors started getting out of your fund, and that drove the share price down, you could redeem your shares, but they might not be worth much. For example, if shares were worth $30 one day and sellers bailed out until the price went down to $2 per share, you could redeem your shares -- but only at $2.
Short of doomsday scenarios, the greater likelihood is that a mutual fund could simply make bad investments. If your fund puts a lot of money into companies that fail, you could lose a large percentage of your investment. You wouldn’t have any recourse for getting your money back.
You don’t have to panic every time your mutual fund goes down in value, unless there’s some overwhelming financial news that makes you think your fund is in trouble. You must realize that any fund can go down in value temporarily. When you see a drop, search online for news on your mutual fund or any of the companies it invests in to see if there’s something you should be concerned about. Otherwise, you may merely be experiencing the normal ups and downs that come with investment risk.
- FINRA: Your Rights Under SIPC Protection
- U.S. Securities and Exchange Commission: Securities Investor Protection Corporation (SIPC)
- Securites Investor Protection Corporation: What Is SIPC?
- CNNMoney: Basics of Investing in Mutual Funds
- Bankrate.com: Simple Guide to Mutual Funds
- U.S. Securities and Exchange Commission: Invest Wisely-An Introduction to Mutual Funds
- The Christian Science Monitor: If Your Mutual Fund Fails, What Happens to Your Money?
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.