Is it a good idea to invest with multiple mutual fund companies and brokerage firms? Diversification does not always apply only to asset classes and types of investments. Sometimes it can be wise to keep your investment assets in more than one mutual fund company or discount online brokerage.
When a Mutual Fund Company Fails
When you hold mutual funds, they typically hold the assets on behalf of the investor and are not assets of the mutual fund company or the brokerage itself. For this reason, investors should note that it is very unlikely for a mutual fund company or brokerage to fail and thus cause investors to lose money.
If a rare and severe event such as bankruptcy occurs, when the money and fund company are separate legal entities, the creditors of the fund company cannot claim the fund assets to satisfy the company’s debt obligations. In this worst-case scenario, the investment company managing the mutual funds may face financial problems, but not the mutual funds themselves.
In the case of a severe negative financial event, the assets of each fund will remain protected by the fund custodian. Thus, investors will still be able to redeem or transfer their mutual fund shares to another company. The mutual fund company may also have to sell its business to another mutual fund company or investment management firm. In any case, this will not result in total loss for you as an investor.
Note: There is no need to worry about losing your mutual fund due to the bankruptcy of the mutual fund company, so do not invest with multiple fund companies for that reason alone.
When Mutual Fund Losses are Covered
In the unusual case that some or all of a client’s cash and securities are lost, the Securities Investor Protection Corporation (SIPC) covers losses up to $500,000 (with a maximum of $250,000 for cash losses) for mutual funds covered at a SIPC member brokerage.
Therefore, if the investor wants to play it as safely as possible, they would not keep more than $500,000 in mutual funds at a single company. However, you must consider that SIPC protects investors from the bankruptcy or insolvency of a brokerage firm. Mutual fund companies are not brokerage firms, so their clients do not receive SIPC protection. The only real protection that mutual fund investors get is if they have cash in a pooled account or a deposit account belonging to the brokerage.
Diversification that Matters
It’s important to note that the bankruptcy of a mutual fund company, especially large companies like Vanguard or Fidelity, typically does not cause significant financial troubles that harm investors. The only real risk that mutual fund investors should be concerned about is market risk (capital loss). Of course, that same risk is part of the potential for high returns.
To achieve proper diversification, investors should focus more on diversifying among several types of mutual funds, rather than mutual fund companies. This mixture of mutual funds should include higher-risk equity funds, cautious fixed-income funds, and short-term money market funds.
Note: The ideal mix of mutual funds will depend on your current financial goals and the level of risk you are comfortable with.
Creating a blend of fund types is your best protection against market fluctuations, which pose a much greater risk to you than any specific mutual fund company. If you have more than $500,000 to invest, it may be wise to spread your money across several mutual fund companies to ensure it is protected by SIPC. Otherwise, it is not a real necessity.
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Sources:
- Kiplinger. “How Mutual Fund Assets Are Protected.”
- SIPC. “What SIPC Protects.”
Source: https://www.thebalancemoney.com/should-you-invest-with-more-than-one-mutual-fund-company-2466603
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