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Mutual Fund Risk? How Do They Work
Old 04-19-2017, 10:08 AM   #1
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Mutual Fund Risk? How Do They Work

This has been question I've had for a while and thought I'd run it past the investment gurus here. This is just an idle question on how things work with MFs.

Apologies in advance if this question is the result of a gross misunderstanding on my part of how all of this operates!!

When I buy a straight out equity, I get a piece of paper (that resides somewhere) that says I own X number shares of that stock. I'm a legal owner of .0000X% of that company.

If I buy a mutual fund made up of that stock (among dozens of other companies), there is a piece of paper that says I own that fund, but AFAIK not the .0000X shares of each company. This is further complicated when I buy a 'fund of funds' type of fund.

I'm getting further removed from proof of ownership of that company.

So, if I owned an outright share of X company through Fido I'd have a piece of paper showing that I legally own a piece of the company and would have recourse in the unlikely event that Fido went south as did Lehman Brothers.

But if I own a fund of funds through Fido and they went south what proof do I have that I even owned those shares? I have a statement that says I own(ed) X shares of the MF but no real ownership of the stock itself.

Or do I?

Again, this is just an idle question in the 'just wondering' category.

Thanks in advance for any insights.
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Old 04-19-2017, 10:50 AM   #2
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Simple answer is that the mutual fund is a company too. You own a piece of that. Basically the same situation as owning a share of any other company, since the assets of the mutual fund company are shares of other companies.
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Old 04-19-2017, 11:18 AM   #3
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Actually, paper shares are a thing of the past. Whether mutual fund or stand-alone company, your ownership is almost certain to be recorded as a book entry. In some cases you may be able to request that a paper share be created and sent to you, but you will surprise the he# out of your broker if you ask.
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Old 04-19-2017, 11:36 AM   #4
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Nothing but a bunch of bits. These bits are regulated, audited and serve to document legal ownership. Gets abstracted even further with funds owned by other brokerage accounts, but it's still the same.
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Old 04-19-2017, 11:37 AM   #5
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This is my understanding...the mutual fund company (not you) owns the shares of the companies (e.g., Apple, GM, Verizon) comprising the fund. You own shares of the fund. So you are one step removed from owning shares in the underlying companies. You cannot vote the shares of stock in the underlying companies; only the MF company (owner of the shares) can.

If one of the underlying companies goes belly-up that simply reduces the NAV of the MF shares since the shares of the belly-up company are now worthless.

If you own shares of a MF run by XYZ MF Co., you do not own shares of XYZ MF Co. If you want to own shares in XYZ you have to buy shares of XYZ. (You might own a MF that owns XYZ MF Co. as one of its holdings but then the first paragraph applies.) Note that different MF companies have different corporate structures. T. Rowe Price, foe example, is a public company and you can buy their stock shares. Fidelity is privately held so you can't buy their stock. Vanguard, as they like to say, is a mutual MF company which is owned by its own funds which, in turm, are owned by the owners of their funds.

If my understanding is incorrect Please feel free to correct me.
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Old 04-19-2017, 11:49 AM   #6
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I wouldn't get worried about getting some kind of paper proof of fund ownership.

Take savings bonds as an example. I don't even think paper is even issued anymore.

Back in the they day before being an index investor I remember reading about precious metal funds. I never invested in any precious metals funds (too aggressive for my taste), but thought that a bit odd as I could have ownership is precious metals but no real bling .
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Old 04-19-2017, 12:19 PM   #7
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OP here.
Yeah, I'm not hung up on the actual "paper" part of it but more of the idea of having some proof/recourse should TRPrice or Fido were to go south and close their doors.

Unlikely sure, but I just wonder how I'd get back control/access to my money in such a case.
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Old 04-19-2017, 12:30 PM   #8
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Quote:
Originally Posted by marko View Post
OP here.
Yeah, I'm not hung up on the actual "paper" part of it but more of the idea of having some proof/recourse should TRPrice or Fido were to go south and close their doors.

Unlikely sure, but I just wonder how I'd get back control/access to my money in such a case.
I guess I don't understand how the fund company goes away and the shares of publicly owned assets owned by the fund unbecome property of the fund?

The fund has legal ownership of the shares and the system of record says you own X shares of the fund..
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Old 04-19-2017, 12:36 PM   #9
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I guess I don't understand how the fund company goes away and the shares of publicly owned assets owned by the fund unbecome property of the fund?

The fund has legal ownership of the shares and the system of record says you own X shares of the fund..
Maybe that's where I'm getting hung up. I see the fund company (Fido for example) as the "operator" of the MF or FoF. If Fido went away, who operates the MF? How would one get in touch with the MF without someone like Fido to do that? In this case I'm talking about MFs that are created by the likes of Fido.

Again, I could be way out in the weeds here so any insight is appreciated.
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Old 04-19-2017, 12:41 PM   #10
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You own shares of a fund when you buy an ETF or mutual fund. The fund itself owns shares of companies and/or other funds/bonds/etc.

If the company that runs the fund goes out of business or terminates a fund, put simply, the fund will be liquidated and the shareholders of the fund will receive the liquidated assets (and any associated capital gains/losses associated with those assets the fund owned). This article sums up the basics of a fund liquidation Liquidation Blues: When Mutual Funds Close
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Old 04-19-2017, 12:43 PM   #11
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Read about SPIC insurance. Next ask your brokers in what name the stock and MFs are held in. The next thing to look at, are you using margin or allowing your shares to be loaned out?
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Old 04-19-2017, 01:30 PM   #12
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Originally Posted by exnavynuke View Post
You own shares of a fund when you buy an ETF or mutual fund. The fund itself owns shares of companies and/or other funds/bonds/etc.

If the company that runs the fund goes out of business or terminates a fund, put simply, the fund will be liquidated and the shareholders of the fund will receive the liquidated assets (and any associated capital gains/losses associated with those assets the fund owned). This article sums up the basics of a fund liquidation Liquidation Blues: When Mutual Funds Close
Thanks...I think this is what I was looking for.
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