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Can A Mutual Fund Go Bankrupt? What Happens To Your Money Then?

by Carlos Leave a Comment

Anyone who ever asked that kind question before jumping right in to invest in a mutual fund company — well, in any type of investment for that matter — must be using his head. I personally admire such quality in an investor.

Unfortunately, if that same guy happens to raise such question to his friend, I bet he is not likely to get a reliable, authoritative and correct answer.

I am writing this article for two reasons:

(1) To once and for all address the fears of mutual fund investors ( or would-be investors ) who are forever worried about their investments just vanishing into the thin air like what usually happens in Pyramiding Scams or banks that go out of business, and;

(2) To elaborate my response to a client’s SMS message sent to me the past weeks, which I quote,

“Sir good morning. Bigla lang pumasok sa isip ko… Paano kung biglang bumagsak ang FAMI. Ibig sabihin ba nito lost na ang investment namin?”

Such smart question deserves a smart answer!

So please read carefully and may this article help you to increase your Financial IQ.

FAMI Is Not A Mutual Fund Company

If you’re one of my clients, I’d like you to remember this: The First Metro Asset Management Inc ( FAMI ) is not a mutual fund company, but rather just a fund manager.

Fund Managers are sometimes also called investment managers and they have two main functions:

  1. To implement the investment objective of the mutual fund company they are managing.
  2. To manage the underlying portfolio of stocks and/or bonds and their trading activities

In the case of FAMI, the following are the mutual funds under its management:

  • Save & Learn Equity Fund, Inc.
  • Save & Learn Fixed-Income Fund, Inc.
  • Save & Learn Balanced Fund, Inc.
  • One Wealthy Nation Fund, Inc.
  • Save & Learn Dollar Bond Fund, Inc.

Have you noticed the “Inc.” at the end of their names? That’s short for “Incorporated”, which means each mutual fund is registered as a separate corporation – or more specifically as an investment company by virtue of R.A. 2629 or the Investment Company Act of the Philippines.

As an investor, you are not invested in FAMI, but rather in one or more mutual funds under the management of FAMI.

You cannot invest in the fund manager, but you can invest in one of the mutual funds it is managing. So, if you have shares in Save and Learn Equity Fund (SALEF), you are an investor of SALEF and not of FAMI.

It’s like this:

You → ( SALEF / SALBF / SALIF / OWN ) ← FAMI

You invest in one or more mutual funds, then FAMI manages the entire profolio.

Get the idea?

( See also: What is a Mutual Fund? )

This diagram would help.

Flow of Mutual Fund Investments
The Investment Flow in a Mutual Fund. Investors pool their money and invest it a basket of securities like stocks and bond. The Fund Manager oversees the entire portfolio and manages it according to the objectives of the fund.

Now this begs the million dollar question, “What happens to your investment when FAMI (the fund manager) goes out of business?”

The answer is this: Just kick-out the Fund Manager and replace it with a better manager. You have every right to do so. You and several other investors in the fund will simply have to find another company to manage your investment.

As an owner-investor of a mutual fund, you can decide, collectively with all other investors of the fund, to find a fund manager who you think can best handle your investments. In fact, you are doing this every year in an event called the Shareholders Meeting.

In other words, if FAMI goes out of business – I doubt if that will ever happen — your investment money is not affected at all.

Answer Number 2: As an investor, you can pull-out your investment anytime of the day if you so decide. You don’t have to wait for the “worst” to happen. That’s your option if you are really nuts.

( See also: 7 Advantages of Investing in Mutual Funds. )

For FAMI Investors Only:

One more thing. For FAMI Investors, your money is not deposited in FAMI or even in the mutual fund of your choice, whether SALEF, SALBF, or SALFIF.

Mutual Fund Assets are held in the custodian bank… HSBC as of now.

FAMI itself does not hoard the investors’s money in its safety vault. Therefore, it is impossible for FAMI to run away with the money.

If FAMI decides to buy shares of stocks from SM, Ayala, PLDT, D&L, etc, it will just instruct the custodian bank ( HSBC at the time of this writing) to do so.

And for this to happen, the SEC must be notified. In fact, mutual funds are mandated to disclose the Fund Value at the end of the business day… each banking day.

That is how strict, SEC is about investments in mutual funds.

( See also: How safe are mutual funds in the Philippines? )

Next Question: Can A Mutual Fund Company Go Bankrupt?

First, the Bad News: It’s possible. Investing is like going into business. Sometimes a business doesn’t perform well, or just goes under.

There’s no guarantee!

I’m just being real here. Being in business exposes you to many forms of risks. Investing in stocks, bonds, mutual funds, unit investment trust funds (UITFs), real estate trust, limited partnerships is likewise always associated with various forms or risks, which could undermine it’s overall performance.

( See also : The Risks of Investing in Stocks and Bonds. )

For the Good News: That’s very unlikely to happen to a mutual fund, especially Stock Funds or Balanced such as SALEF and SALBF Mutual Fund. These two mutual funds are highly diversified portfolio of stocks and bonds. Meaning their investments are spread across different stocks from solid companies in the Philippines, across different business sectors, plus various bond issues from big corporations and even the government.

They own as many as 20 to 30 companies at any particular time.

As I write, the Save and Learn Mutual Fund has released its fund report dated March 20, 2015. The Top 10 Equity Holdings is shown below.

Save and Learn Equity Fund Top 10 Stock Holdings as of 20-March-2015
Save and Learn Equity Fund Top 10 Stock Holdings as of 20-March-2015

You may be familiar with some of those names, right? There’s Ayala Land, SM, URC, Robinsons Retail, D & L, Puregold, etc.

Do you think they will go bankrupt anytime soon? Not likely!

But I tell you, it’s possible.

Now, going back to the question of SALEF going bankrupt, what would it take for this happen?

First and foremost, it would take all the underlying companies the fund is invested in to go bankrupt first. It would take a very unlucky, but possible, event in the Philippines for all those underlying investments to go down the drain.

But before that could happen, hopefully FAMI — the fund manager, remember? — is quick enough to trade its holdings in favor or better stocks. This is the time when you would be thankful you have a smart fund manager on your team.

( See also : Cash, Stocks, Bonds – The Building Blocks of a Mutual Fund. )

The Worst Case Scenario: The Mutual Fund Closes. What Then?

Now, this part is for the doomsayers who are forever waiting for the World War III or End of the World to happen.

For the fund to close, that decision has to be decided by its investors. Remember the investors are the shareholders, right?

You and me and several other investors — big and small, individual or institutional investors — have to decide on the fate of OUR investment company.

In fact, we do it every year in an event called Shareholders Meeting. We call it, FAMily Reunion. And it will happen again some time in June or July.

Among other things in the agenda, we decide :

  • Who our Fund Manager will be. Yes, we can select other fund manager if we are not satisfied with FAMI.
  • Who sits in the board of directors.
  • Who our custodian bank will be.

And some other things, including, believe it or not, whether you want to close shop or to still continue, if you so decide to put it in the agenda.

(But please don’t expose too much of your financial ignorance or you’ll become a laughing stuff of the other investors in the fund.)

Now going back to the worst thing: what if the fund really goes bankrupt?

For example today, SALEF is bankrupt already. What will happen to your money?

  1. Remember, they are required to disclose the Fund Value daily. This is reflected in Net Asset Value Per Share (NAVPS) by 5:00 PM.
  2. As an owner of the fund you own, X number of shares.

If the fund goes bankrupt, you will get back your money which is the NAVPS times the Number of Shares that you own.

FAMI will write a check in your name with that amount. Or you can request that money be deposited to your bank account.

It’s simple. It’s actually just like redeeming or withdrawing your shares from the fund.

Most importantly, please remember that mutual funds don’t own any tangible assets like condominium buildings, manufacturing facilities, or even office and chairs.

In fact, they don’t even have employees! Did that surprise you? So, no separation fees to worry about!

What mutual funds have are marketable securities that can be sold anytime. Back to basic, these assets include:

  • Common Shares from different companies with good track records
  • Corporate Bonds
  • Government Securities

If investors want their money back, the fund manager will simply unload these assets and sell them to other interested parties — and there are surely a lot of takers waiting in line — then distribute the money back to the investors.

Easy! No sweat!

( Related article: How to grow your money starting with P 5,000? )

I hope this clears things up for you.

So, relax! FAMI, SALEF, SALBF, OWN and other mutual funds in the Philippines will be here for a long, long time.

This year FAMI will be celebrating its 10th year anniversary.

So to the investors of FAMI, Advance Happy 10th Anniversary to you!

Hope to see you guys in the next 100 years!

Spread Financial Literacy in the Philippines!

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FAMI Mutual Fund Advisor

Hi there. I am your host, Carlos Velasco.

I hate scam.
And I am allergic to hype.
As your FAMI Mutual Fund Advisor,
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Smart, Confident and Fearless Investor!

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