Can Mutual Funds Become Worthless?

Q: The huge decline in fund values this year has me wondering if I should be worried about my funds becoming worthless?

A: Theoretically, if a fund's total assets were invested in the stock of 50 companies and all 50 went bankrupt, then, yes, the fund's holdings would be essentially worthless. Realistically, that's not going to happen. For example, it is extremely unlikely that all 50 companies — each with a different executive team, products, markets, etc. — would implode at the same time, no matter how bad the overall economy might be. Secondly, why would a fund manager, whose job it is to closely examine research on company strength, profitability, and prospects, continue to hold 50 financially faltering companies in his portfolio? Likely, he would begin to jettison non-performers long before the companies reached bankruptcy stage.

By the way, to qualify as a "diversified" fund under securities law, a mutual fund must have at least 16 holdings. Most of our Upgrading funds have more than 25 holdings; some have well over 100. You can check specifics by looking at the "Number Holdings" column in our Recommended Funds report.