Funds in a depression

[adamu]

In regards to recently started funds such as eMaxis Slim, the SBI and Rakuten stock wrappers, etc. During a significant depression, say 50%+ downturn for 5 or more years, Is it possible that enough people give up on them that they decide to close the funds? What happens in that case? Do existing holders effectively get forced to sell at the depressed prices? Or would the funds just carry on with their depressed values?

I'm sure this is discussed elsewhere as it's not Japan-specific, and will have a more detailed search later, but thought I'd bring it up here in the mean time.

[RetireJapan]

That is a very good question.

[jcc]

I can't say for sure what exactly will happen but a couple things worth noting:

if they just close out the fund, selling all the assets, you will get its present value, the worst negative consequences would be
- paying out taxes on any gains or generating losses. You might be able to offset either one of these by selling off other stuff that is up or down.
- getting your tax free allocation "wasted"

Now, if it does happen you would just get the present value out, and should probably just stick it right back into an identical product, the only bad thing coming out of it would be the tax consequences, since with these kinds of funds there are no sales loads.

The worst possible case scenario is that the bank itself gets shut down. My understanding regarding this is that the individual depositors are insured up to 10million for this(so if by some bizarreness the bank closes down and cannot return the shares it is holding in your name, the government will cover up to 10m of that). This is not insurance for loss of value of the stocks/bonds, just for the bank itself failing. It does create an argument for the super-cautious person to consider splitting their investments up over multiple banks.

[zeo]

In regards to recently started funds such as eMaxis Slim, the SBI and Rakuten stock wrappers, etc. During a significant depression, say 50%+ downturn for 5 or more years, Is it possible that enough people give up on them that they decide to close the funds? What happens in that case? Do existing holders effectively get forced to sell at the depressed prices? Or would the funds just carry on with their depressed values?

Hehehe...if there's a 50% downturn in these funds, some of which are index funds, then that means the larger stock markets worldwide are also in significant decline. In that situation, you will have bigger concerns than your investment fund liquidating

The worst possible case scenario is that the bank itself gets shut down. My understanding regarding this is that the individual depositors are insured up to 10million for this(so if by some bizarreness the bank closes down and cannot return the shares it is holding in your name, the government will cover up to 10m of that). This is not insurance for loss of value of the stocks/bonds, just for the bank itself failing. It does create an argument for the super-cautious person to consider splitting their investments up over multiple banks.

Not sure about Japan but I'm pretty sure it's the same as the US, this only covers the cash portion of the account. Once you purchase stocks/funds you're a shareholder and this portion is not insured.

[adamu]

Here's an Investopedia article: https://www.investopedia.com/articles/m ... dation.asp

The most concerning quote is:

If investors are losing money, the fund is likely to stay open as long as the fund can be operated profitably, but when the fund company starts to feel the heat, the fund is terminated. After all, fund companies are in business to make a profit.

It's really making me question whether I want to go all-in on these new low cost funds. Unlike vanguard, these are profit-making companies, and I don't want to have the funds liquidated during a depression because everyone sells out and the fund managers realise they have become untenable.

Now, if it does happen you would just get the present value out, and should probably just stick it right back into an identical product, the only bad thing coming out of it would be the tax consequences, since with these kinds of funds there are no sales loads.

That's a good point. Maybe not so bad after all then.

I'm currently looking at the process for converting from US ETFs to Japanese funds. It looks like doing the sale, waiting to settle, exchanging the currency, waiting to settle again, then making the purchase is going to take about a week. Just long enough to get out-of-market jitters.

[RetireJapan]

I'm currently looking at the process for converting from US ETFs to Japanese funds. It looks like doing the sale, waiting to settle, exchanging the currency, waiting to settle again, then making the purchase is going to take about a week. Just long enough to get out-of-market jitters.

I considered that, then decided I'm too lazy and will just leave the legacy investments for now. I'll put new money into MFs. Eventually I may consider selling the ETFs first

[adamu]

That's a fair attitude. In fact, a good chunk is in a NISA which I don't really want to sell. That'll continue accumulating dividends in USD, meaning I'll still have a lingering USD balance in my account. Maybe I'll just wait until all the ETFs' NISA time expires, then sell it all in one go. That also has the benefit of having a few years being invested in both the ETFs and the Japanese funds, to see how they compare.