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 The
Money Management Newsletter: Investing
in Mutual Funds
Mutual funds offer built-in safeguards
By David J. Newman
Money Management Newsletter
In the summer of 1987, an Edmonton-based trust company
called The Principal Group collapsed.
However, mutual funds managed by The Principal Group
remained unaffected, even though mutual
funds (like stocks and bonds)
are not eligible for Canada Deposit Insurance Corporation (CDIC) protection.
Why did this happen? Investors, not the fund
managers, own the investments in mutual funds. When The Principal
Group folded, Metropolitan Life assumed management of the mutual funds
and for the investors, it was business as usual.
Investor ownership is one of the great strengths of
mutual funds. Mutual fund managers buy and sell securities,
and manage the investments on behalf of their investors but they don't
own them.
If the manager of a mutual fund ever gets into financial
difficulty or even goes bankrupt, investors' assets are still protected
because the fund manager doesn't own the fund or its individual securities,
the investors do. In fact, the assets (stocks, bonds and cash) must be
held in trust by a custodial
institution, usually a bank or trust company, and the fund manager
can not touch them.
The arm's-length
relationship between managers and the mutual funds they manage is important.
Not one dollar of investors' money has ever been lost in Canada because
of a mutual fund company going bankrupt or having financial difficulties.
Accountability also goes hand-in-hand with investor
ownership. Mutual fund unit trusts (the mutual fund management company)
must issue detailed annual
and semi-annual statements to unitholders just as corporations do.
This means that by law, investors are kept well informed about the performance
of their investments.
So if you hear someone say mutual funds are not guaranteed
or CDIC-insured, remember that investors own the funds, mutual fund managers
manage the money and custodians hold the money in trust. Mutual fund investors
do enjoy protection, plus an opportunity to realize superior gains over
locked-in investments.
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