Library of Informative Articles

Is My Mutual Fund Insured?

Since we are asked this question on occasion we thought an overview of how mutual fund investments are structured would be of interest to our readers.

In the summer of 1987, the Edmonton-based trust company, The Principal Group collapsed. However, mutual funds managed by The Principal Group remained unaffected, even though mutual funds (like stocks and bonds) are not eligible for Canadian Deposit Insurance Company (CDIC) protection.

Why? Unlike with a GIC where the investor lends their money to an institution who then again lend it to someone else, mutual fund investors own their investments. Investors, not the fund managers, own the investments within a mutual fund. The mutual fund managers manage the investments on behalf of their investors (within guidelines outlined by the prospectus of the fund) but they don’t own them. When the Principal Group folded, Metropolitan Life assumed management of the mutual funds, and for the investors it was business as usual. Investor ownership is one of the great strengths of mutual funds.

If the manager of a fund ever gets into financial difficulty or even goes bankrupt, investors’ assets are protected because the fund manager doesn’t own the fund or its individual securities- the investors do. In fact, the assets (stocks, bonds and cash) must be held in trust by a custodial institution (usually a bank or trust company), and the fund manager can’t touch them. The arm’s-length relationship between managers and the mutual funds they manage is important. Not one dollar of investors’ money has ever been lost in Canada because of a mutual fund company going bankrupt or having financial difficulties.

Accountability also goes hand-in-hand with investor ownership. Mutual fund unit trusts (such as MacKenzie and Trimark) must issue detailed annual and semi-annual statements to unit holders just as corporations do. This means that by law, investors are kept well-informed about the performance of their investments. This is why you receive a great deal of information on your investments in the mail each year. So if you hear someone say mutual funds aren’t guaranteed or CDIC-insured, remember: investors own the funds, mutual fund managers manage the money, and custodians hold the money or assets in trust. Mutual fund investors do enjoy protection, plus the opportunity to realize superior gains over guaranteed investment products.

Back to Library...