Warning: Your Mutual Fund Might Disappear

A mutual fund can vanish without warning, right out from under you -- gone without a trace. Each year, many funds pull a disappearing act; some are shuttered completely, while others merge with surviving funds. But if your fund's suddenly gone missing, don't start posting fliers around the neighborhood. Its disappearance could be a blessing in disguise.

Here today, gone tomorrow
Fund disappearances ran rampant last year. According to Morningstar, more than 150 funds -- mostly underperformers -- ceased to exist during the first nine months of 2009. During the rally, it quickly became clear which funds had promise and which didn't.

Mergers can serve both investors and mutual fund companies well. For investors, a merger moves your money out of a stinker of a fund, and into a new one that has at least a better chance of delivering more impressive returns. Similarly, paring 16 fund operations back to six can save a fund company considerable expense, and help concentrate assets to make the surviving funds more profitable. It's estimated that a fund typically needs between $50 million and $100 million in assets to make money for its managers. Recent turbulence in the stock market shrunk the value of many funds, as asset values fell and shareholders withdrew their money.

If your fund goes missing
How should you cope if your fund disappears in a puff of smoke? Here are a few tips:

• Pay attention to your mail. Though your company will likely inform you of big changes, many people don't bother to read communications from their fund providers.

• Once you know that your fund is now part of a new fund, get to know the new management, and make sure you have faith in its personnel and its strategy. Some funds end up merged into others with entirely different investing goals. If you don't pay attention, your old dividend-seeking fund might get absorbed by a more growth-oriented one.

• Above all, if you've got stinkers in your portfolio, you don't have to wait for it to disappear or be merged to get rid of them. We've rounded up just a handful of the many promising funds with impressive track records over the past decade:

Data: Morningstar.com.

Even a good, low-cost index fund will serve you better than a dying underperformer.

There's no reason to put up with lousy performance from your funds. Don't wait for a fund to disappear before you take action.

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