How Mutual Fund Assets Are Protected
There are several safeguards to insure your money is safe if a fund-management company goes bankrupt.
Are mutual funds covered by SIPC?
No, mutual funds generally aren't covered by the Securities Investor Protection Corporation unless they are held in a brokerage account. But don't panic: The funds are subject to very strict regulations that protect your money.
The Investment Company Act of 1940 created an intricate system of checks and balances to keep mutual fund money safe.
Each mutual fund is organized as a separate company from the fund's management, and its assets are held by an independent custodian, usually a specialized bank. Even if the fund-management company goes bankrupt, its creditors can't touch the money in the mutual fund, which is held in a separate trust for investors.
The custodian must keep the mutual fund's assets separate from its other accounts and can't touch the money even if the bank fails.
The mutual funds must also file detailed semiannual reports with the Securities and Exchange Commission, provide financial reports to shareholders and be audited annually by an outside firm.
The Investment Company Act of 1940 also requires a percentage of the fund's board to be independent from the fund's investment adviser. And it requires anyone who has access to the fund's securities to hold a fidelity bond, which would pay out if someone did manage to steal any of the money.
All of these rules are why it's so expensive and complicated for anyone to start their own mutual fund.
If your mutual fund shares are held in a brokerage account, they are protected by SIPC just like other securities if the brokerage firm goes bankrupt.
These protections, of course, have nothing to do with the value of the shares, which will rise and fall depending on the value of the underlying investments.