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Tag Archives: Safety of Mutual Funds

Can a Mutual Fund go bankrupt?


* Source of Pic : lastbull.com

Investors having a diverse portfolio of stocks and shares would have had at least an occasional experience of one or more of the companies becoming insolvent or simply “vanishing” overnight. Kingfisher is the latest addition to the list. As mentioned in the previous article, as many as 19 banks have also gone bust last year.

Like banks and companies, can a Mutual Fund go bankrupt? Actually not!

To understand this better, let us analyze the structure of a mutual fund.

In a mutual Fund, the AMC (Asset Management Company) manages the investments and the assets are held by the custodian. Both the AMC and the custodian are controlled by the trustees who are put in place by the sponsors of the mutual fund.

If one of the sponsors want to move out, they have to bring in another sponsor who will have to put in place a new framework of trustees, AMC etc. And if the investor is not comfortable with the new sponsor, he has an option of exiting from the fund with the full NAV within 30 days.

Moreover, the custodian holding the assets is independent of the AMC or the sponsor. This provides structural protection to the assets and the investors’ interest.

Thus, the structure of a mutual fund ensures that the investor is fully protected from all contingencies like misappropriation of funds, fraud etc.

So, the bank in which you hold your fixed deposits could close down, the company whose shares you have bought could go in to liquidation overnight. But your Mutual Fund investment can trade below par, perform below expectations but can never go bust causing you to lose your entire investment. Yet the share of bank deposits in household savings in India is around 55 %, while the share of Mutual Funds is less than 10 %. Is this ratio justified? Your thoughts and feedbacks are welcome!

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