Protection for Investors
One of the reasons for the continued popularity of mutual funds is the extensive regulatory framework in place to safeguard investors. Some commonly asked questions about the safety of mutual fund investments are as follows:
How is my investment safeguarded?
There is no protection against potential investment losses that occur due to market risk. However, in accordance with provincial laws, a mutual fund’s assets belong to the fund and its unitholders, not to the mutual fund company or portfolio manager who will be responsible for administrative and portfolio investment decisions. In addition, a Canadian chartered bank or trust company, which is protected under banking and trust laws, acts as custodian, holding the assets of the fund.
What happens if the mutual fund’s trustee, manager, or custodian experiences financial difficulties?
Since the assets of the mutual fund are isolated from those of the fund’s trustee, manager and custodian, they are not available for any use or purpose other than the investment objectives of the mutual fund.
Why isn’t my mutual fund investment covered by deposit insurance (CDIC)?
Deposit insurance applies to “deposits” and most guaranteed investment certificates of deposit-taking institutions, such as banks and trust companies. Units or shares of mutual funds are “securities” and do not satisfy the definition of a “deposit” or eligible assets required by CDIC.