Should You Invest With More Than One Mutual Fund Company?

Why and When You Need to Consider Holding Investment Assets With Multiple Firms

Is it safer to invest with more than one mutual fund company?. Getty Images

Diversification doesn't always apply only to asset classes and investment types. Sometimes it can be wise to hold your investment assets at more than one mutual fund company or discount online brokerage firm.

But should every investor spread assets among multiple financial firms or is the decision made on a case-by-case basis? What are some good reasons for investing in more than one mutual fund company?

Why and When to Hold Investment Assets at More Than One Firm

When you hold mutual funds, they are typically held in trust on behalf of the investor and are not assets of the mutual fund company or brokerage firm. For this reason, investors should note that it is extremely unlikely that a mutual fund company or brokerage firm will fail and thus cause investors to lose money.

If an extreme and rare event occurred, such as bankruptcy, and when the funds and the fund company are separate legal entities, the fund company's creditors could not claim the funds’ assets to pay the fund company's debt obligations under the bankruptcy. In this worst case scenario, the mutual fund company would go bankrupt but not the mutual funds. Each fund’s assets would remain in the protective custody of the fund’s custodian bank. As a result, the investors would still be able to redeem or transfer mutual fund shares to another company.

Are Mutual Fund Investors Covered for Investment Losses?

In the unusual case where some or all of a customer’s cash and securities are missing, Securities Investor Protection Corporation (SIPC) insurance covers losses up to $500,000 (maximum of $250,000 for cash losses).

Therefore, if an investor wanted to play it as safe as possible, they would not hold more than $500,000 in mutual funds at one company.

Also keep in mind that SIPC protects investors from the bankruptcy or insolvency of a brokerage firm. Mutual fund companies are not brokerage firms, so their clients do not receive SIPC protection. So the only real protection mutual fund investors get is if they have cash in a sweep account or deposit account that is proprietary of the brokerage company.

It is important to note that bankruptcy of a mutual fund company, especially a large one like Vanguard or Fidelity, is not likely to have extreme financial problems that would harm investors. The only real risk that mutual fund investors should be concerned about is market risk (the loss of principal). But even then it is that same risk that is part of the potential for achieving high returns.

To achieve proper diversification, investors should be focus more on diversifying among several mutual fund types, not mutual fund companies.

Source: Vanguard Investments via Oblivious Investor: Is It Safer to Use Multiple Fund Companies?

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.