In 2003, scandal erupted in the mutual fund industry when regulators discovered mutual fund firms were defrauding customers through practices that favored their big clients but hurt smaller investors. While the years since then have quieted in the industry, the scandal proved to be a wakeup call to investors, who assumed mutual fund investments were a safe haven from the turbulent world of individual stock investment. The lesson learned: Mutual funds, like any investment, can be risky business. So how do you safeguard your mutual fund investments in the event of possible future scandals?
Don’t Sell so Fast
Investors’ natural reaction when they hear of trouble with a mutual fund firm or other stock investment is to sell their shares immediately. Instead of creating a bigger mess for yourself, however, explore your options first. Speak with your financial planner, accountant, or attorney to fully understand the ramifications of the problem rather than reacting drastically. Take some time to decide whether a move is in your best interest in the long run. Investigate what actions are being taken by the firm, and assess the strengths and weaknesses of the management behind the organization.
If you’re having difficulty reaching a decision, ask yourself whether you would invest in the fund. If the answer is no, it might be time to sell. Throughout the decision-making process, keep in mind that if you’ve held these shares for a relatively short period of time, you could incur capital gains taxes of up to 35 percent.
After careful consideration, if you still decide that your investment is beyond repair, move forward with the selling process. You can start by selling back to the fund and liquidating your shares. If you own an open-ended mutual fund, you can generally sell shares at any time without difficulty.
While it’s impossible to predict the outcome of every investment decision, take certain precautions to avoid adding your story to the front-page news. As a general rule of thumb, if a buying decision sounds too good to be true, it probably is. Try to avoid popular sells and instead carefully research funds you’re considering.
It’s important to feel comfortable with the investments and decisions you are making, based on the given risk factors. If the pressure is too much on a given fund, that investment is probably not right for you. After suffering a loss or dealing with companies under legal investigation, the obvious next move is to transfer your accounts to fund firms with clean records. Unfortunately, no surefire way exists to prevent your mutual funds from going in the wrong direction, but you can adjust and change your investing actions once you discover a problem.