Investing 101

Mutual funds have extra safety measures built in

Craziness. That’s how most of us would describe the markets over the last couple of months. Huge financial institutions in the US – Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and even Fannie Mae and Freddie Mac – have suffered severe losses, and either collapsed, were bought out or bailed out in the current credit crisis.

So far, no mutual fund company has succumbed to such losses. But events like these create questions in investors’ minds. Would you lose the money you’ve invested in your mutual funds if the fund company experienced financial difficulty or went bankrupt?

The short answer is no.

Canadian securities regulation requires that mutual fund assets must be held “in custody” by a large, secure Canadian financial institution – generally a chartered bank or trust company (“the custodian”).

So if a Canadian mutual fund company fell into financial distress or bankruptcy (a highly unlikely event), the investment assets – which represent your holdings with that company – would remain in the hands of the custodian. Even creditors of the fund company would be unable to claim those assets as part of a settlement with the company.

It is unlikely that a custodian would experience financial difficulty. And if they did, your investment would be further protected, because a mutual fund’s assets must be kept separate from the custodian’s other holdings. In fact, at no time do they form part of the custodian’s corporate assets and are recorded separately in their audited financial statements.

This does not mean your investment will not fluctuate. A mutual fund goes up and down in price according to changes in the value of the fund’s investments.

For more information about how Mackenzie protects your interests, click here.