Vanishing Funds

Al Thomas

Visitors: 290

No, not the money you have in your brokerage account, but mutual funds. This year so far more than 600 mutual funds have vanished. Where did they go and what happened to the money in those funds that belongs to the investors? The mutual funds were either liquidated or merged out of existence.

Not to worry. Investors did not lose any money, but there could be tax consequences. If the mutual fund is in a tax-sheltered plan of some kind it won't make any difference as far as taxes go; however, if the investor is not in a tax shelter he will be responsible for the capital gains taxes, if any. When a fund manager liquidates a stock for a profit within the portfolio the profit must be declared and a capital gain distribution sent to all investors in the fund.

The situation is different if there is a merger. The stocks within the fund are absorbed into the surviving fund and may or may not be sold depending on the investment philosophy of the fund manager. For the investor who wants to be invested in a particular type of fund this may deviate from his personal goals.

The big and famous funds don't merge or liquidate, but in fund families such as Fidelity, Liberty, Janus, etc. they have been known to merge their weak funds into stronger ones. The prime reason being that the fund is not making any money and is unable to attract new investors. Usually the fund is taken into one that has a similar portfolio and this helps a fund family as it buries the losers and shores up their overall track record. It does reduce overall expenses and works to the advantage of the investor. You must be aware that sometimes money is moved from one non-performing fund to another. You have to find this out for yourself.

One good thing about the liquidation of a poor performer is that it forces the investor to move his money from a bad situation to (hopefully) a better one.

This year is not going to be a banner year for the majority of mutual funds. It should force many investors to take a closer look at what these fund managers have done with their money. At this time it might be a good idea to evaluate what your funds have done for you lately. If over the past few years they have not outperformed the S&P500 Index it would be a good time to sell to take a cash position until after the first of the year. You don't want to own a fund that has gone down in value that might hit you with a capital gains distribution on which you must pay taxes. That adds insult to injury.

Be aware that this last quarter is when most liquidations and mergers occur. Five percent of all mutual funds will be gone by the end of the year. If you have a small mutual fund that has poor performance it just might disappear.

Al Thomas’ book, “If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at and discover why he's the man that Wall Street does not want you to know.

Copyright 2005


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