Are Investment Funds Safe?

If you want to make your money work for you, allocating your assets into a variety of investment funds may be a way to make your money grow.

Investment funds are a simple and easy way for investors at all skill levels to diversify their portfolio and invest in securities that would normally be too expensive for them. Although investment funds are not as safe as FDIC-backed savings accounts, depending on the type of investment fund you are interested in, there are sets of “checks and balances” in place courtesy of the 1940 Investment Company Act providing a level of safety to investors.

Investment Fund Regulations

When it comes to investment funds, there are legal provisions in place to protect investors:

  • Every mutual fund is held by an independent custodian and organized as a separate company from the fund’s management
  • The independent custodian is not allowed to access the money and is responsible for keeping the resources separated from the other accounts
  • Semiannual reports must be filed with the Securities and Exchange Commission
  • Financial reports to shareholders must be provided
  • Annual audits are conducted by outside firms
  • A portion of the fund’s board must be independent from the fund’s investment adviser
  • Anyone who does have direct access to the money must hold a fidelity bond that would pay out if a theft occurred

Even with those safety measures in place, there is no guarantee of an investment fund being 100% safe. Even if a fund performed well in the past, it may not do so in the future.

There are costs (such as management fees) that can reduce the profit you may reap. Plus, there is no government insurance backing the investment funds and money can indeed be lost.

About the Author

GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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