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Mutual Funds Gone Down the Drain

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Your mutual fund does worse when its close to extinction. Here's what to do about it.

Of all traditional U.S. mutual funds operating a decade ago, four in 10 shut down before 2014, reports Morningstar.

Why care? Even though you can cash out (or get shares in a fund absorbing the loser), costs rise and performance falls as the end nears, says Daniel Kern, president of investing firm Advisor Partners, who has studied closures.

Here’s how not to get swept away in the failures.

Stopping your losses

Seek high marks. Eight in 10 funds given five stars by Morningstar in 2002 lived to 2012; only 39% of one-star funds did, according to a study Kern co-wrote. Stewardship grades, gauging how shareholders are treated, count too: A and B funds outlast low-ranked ones, says Morningstar’s Laura Lutton.

Don’t think small. Bigger funds aren’t always better, but those that stay small or shrink too much have high failure rates. Be wary of portfolios with assets well under $250 million, says Kern’s collaborator Tim McCarthy, author of The Safe Investor.

Exit early. If you think a fund will close, sell. Funds lose an average of 3.6% in their final 18 months, Vanguard has found. Has your fund already merged into another offering? Be picky, advises San Diego planner Leonard Wright, and sell the new one if you wouldn’t have bought it otherwise.

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