Thursday, September 18, 2008

Should investors be worried about Mutual Funds filing for Bankruptcy

With the current financial crisis in the US, a lot of us has questions about what happens to our investments in mutual funds if the MF files for bankruptcy. To understand the implications, I would like to quote an extract from the Workbook published by Association of Mutual Funds of India.

"A mutual fund in India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. It should be understood that a mutual fund is just a pass-through vehicle. Under the Indian Trusts Act, the Trust or the Fund has no independent legal capacity itself, rather it is the Trustee or Trustees who have the legal capacity and therefore all acts in relation to the trust are taken on its behalf by the Trustees. The trustees hold the unit-holders money in fiduciary capacity, i.e., the money belongs to the unit holders and is entrusted to the fund for the purpose of investment. In legal parlance, the investors or the unit-holders are the beneficial owners of the investments held by the Trust, even as these investments are held in the name of the trustees on a day-to-day basis."

The investments being managed by the mutual fund does not belong to them hence no one can claim them except the unit holders who invested in the fund. Investors of mutual funds need not panic about their investments even if the mutual fund files for bankruptcy.