396 Funds Eliminated So Far This Year

Three hundred and ninety six funds have been merged or liquidated for far this year, well on track to top the 438 funds that were erased in 2008, Morningstar reports.

And the number of new funds being launched is a mere 156 so far this year, compared to the 487 funds that debuted in 2008. If the trend lines continue, 2009 could be the first year since 2002 that the total mutual fund universe decreased.

With assets down due to market declines and skittish investors, funds with less than $100 million in assets under management are due for extinction. It doesn’t matter that the average star rating of the funds being extinguished this year is 2.51, up from 2.33 in 2008. Unprofitable, poorly performing funds will get the axe.

As Morningstar notes, “In addition, any fund that performed particularly poorly in 2008 could be five or 10 years away from recouping those losses and having a track record that’s presentable enough to attract new money. No one is in a rush to launch a new fund, which could be years away from making a profit and will likely draw very little money for the first year as investors have been tight with their purse strings.”

While it’s a good thing that fund companies are ridding their books of a weak fund, investors should be careful that the fund it is being merged into shares the same investment philosophy that they originally chose. And those looking to buy into a merged fund might not be able to see past poor performance due to survivorship bias.

Looking toward 2010, Morningstar expects more funds to be created, once again, in 2010, although like in years past, “90% will be forgettable.”

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Mutual funds Money Management Executive
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