Mutual Fund Name Changes: Don't Fall for It

Investing in a mutual fund has long been a favorite technique of investors. However, mutual funds do not always work out. When a mutual fund changes names it could spell trouble for its investors. Here are a few reasons to be leery of a name change with a mutual fund.

Bad Performance

One of the main reasons that mutual funds change names is because of bad performance. In the corporate world, when a company changes its name it is usually to get away from the performance record of its past. For example, after a company files for bankruptcy, they will often change their name and reorganize. Within mutual fund, the same principle applies.

After a prolonged period of bad performance in the marketplace, mutual funds will often change their name to something else. Although existing investors will still know it's the same mutual fund, new investors might not be aware. Therefore, they can still bring in new clients even though they might have had a bad track record. If your mutual fund changes its name suddenly, you should consider liquidating your shares because it could be a signal of more bad performance in the future.

Rebranding

Another reason that mutual funds change their name is for the purpose of rebranding. When they want to get away from a certain image, it can help start a new name. For example, many funds used to start out with the word "aggressive" in the title. As the market struggled to maintain good returns, the word "aggressive" was not nearly as appealing to investors. Therefore, even though the fund itself might be the same, a name change can make it sound safer than it really is. If your mutual fund changes names do not necessarily expect it to change investment strategies.

Merger

Another reason that a company might change its mutual funds name is that they are merging with another company. This often happens in the financial world, and it could signal big changes to come. When companies merge, new people take over certain positions. This means that the fund managers might be different, the investment strategies might be different, and many other factors involved in mutual fund. Therefore, if a merger takes place while you own shares in mutual fund, you should make sure that you understand what the changes mean. Ask your investment adviser if the investment strategy will remain the same for the fund.

What Could Happen

As a result of investing in a company that is going through a name change, several things could occur. Since one of the main reasons that a mutual fund would change its name is bad performance, you should expect that to continue. When a mutual fund changes names do not expect the performance to improve. Mutual funds often get too big for their own good. When this happens, it is difficult for them to continue to grow any further. At this time is best usually move on and find another investment.

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