Despite the best of intentions for a mutual fund to turn a profit, sometimes they do not. Instead they lose value and may close down (AKA full closure or a mutual fund liquidation). When a mutual fund closes, all the assets must be liquidated and then dispersed back to the shareholders of the fund. It is not uncommon for mutual funds to close due to lack of popularity, investor demands, strategic moves from the funds management company or if the fund value declines.
Since mutual funds are not backed by any type of government insurance, it is not guaranteed that the investors will get their initial cash investment back, however they may recover something after the fund is completely liquidated. When a mutual fund has to shut down, shareholders will be forced to sell their ownership stakes. Additionally, shareholders should be aware that they may not only get less than their original investment back, the timing of the sale of the mutual fund may cause them to have to pay capital gains taxes.
Although it is nearly impossible to predict the ultimate fate of an investment, there are some signs and investor should be weary of that may indicate a downward spiral and possible chance of a mutual fund closing. Some signs of possible vulnerability to closure include more fund traffic from investors cashing in, decreases in performance and a poor history of overall performance. If the entire economy is in turmoil, those signs can just be indicative of an overall problem within the entire capitalist system, but for an individual mutual fund investment, it may be time for you to abandon ship.