Mutual fund investors that have been playing it safe with their investments are now paying the price, the Wall Street Journal reports. Many fund companies have introduced principal protected funds, which essentially guarantees that the investor will be protected from losing their initial investment, and perhaps get a little bit more out of it, the newspaper said. Roughly $10 billion has flooded into such funds over the past four years, coinciding with the downturn in the market.

However, with the Nasdaq and the Dow Jones Industrial Average up recently, a lot of these principal protected funds are being absolutely dusted by other, less safe types of funds. The head of regulatory oversight at the National Association of Securities Dealers, Mary Schapiro, expressed her thought to the Journal that the words "guarantee" and "principal protection" play on the fear and insecurities of investors who have taken a beating over the past few years.

The so-called principal protected funds are designed to limit downside risk. This is done by limiting how much of the assets can be put into stocks. Also, when the markets are down, fund managers move assets into zero-coupon bonds, and theoretically shift out of them when the market rises.

Some critics assert that strategies employed by these types of funds run directly opposite to the concept of "buy low, sell high." They only buy after stocks have begun to rise, and sell after prices have started to decline. The investor has the option of withdrawing funds from the account, but the guarantees on return only apply to assets that have been left in for a predetermined amount of time.

However, even when the market is faring well, principal protected funds still have some value to investors. For example, Jeffrey Oster, president of Aon Annuity & Insurance Services told the Journal that he thought that funds were good for people who have just received a 401(k) rollover and don’t wish to put their money at risk.


The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.



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