The primary way the FDIC protects depositors from losing hard-earned dollars in the event of financial collapse is by insuring deposits known asFDIC-insured accounts. As of 2018, the FDIC insures deposits up to $250,000 per depositor, per insured bank, based on account type. If an insured bank becomes insolvent and fails, depositor funds are insured by the FDIC up to this maximum. While banks may fail, the FDIC protects individual Americans from needlessly suffering the same fate. Many account holders know about this, but that brings the question: are mutual funds FDIC insured?
Unfortunately, mutual funds—like investments in the stock market—are not insured by the Federal Deposit Insurance Corporation (FDIC) because they do not qualify as financial deposits. This article will explore the purpose of the FDIC and what financial investments are protected.
Background of the FDIC: Its Purpose
The FDIC is an independent, government-established agency formed in 1933 in response to the widespread failure of America's banks in the 1920s and 1930s, which contributed to the Great Depression. The debilitating impact of the financial crisis prompted the government to develop strategies for preventing future economic collapse.
One way to prevent the kind of domino effect of the Great Depressionis to isolate economic turmoil in one industry and prevent it from bleeding over into the rest of the economic structure. By monitoring potential threats to banking and thrift institutions, the FDIC seeks to minimize the impact of the economic downturn on depositor funds and the rest of the economy.
Though created by Congress, the FDIC does not receive any government funding. Instead, financial institutions pay a premium for deposit insurance, much likean individual pays a premium for homeowners or auto insurance. In addition, the FDIC invests in government-issued Treasury bonds (T-bonds) that generate regular interest income.
Key Takeaways
- Formed in 1933, the Federal Deposit Insurance Corporation (FDIC) seeks to minimize the impact of the economic downturn on depositor funds and the rest of the economy by monitoring potential threats to banking and thrift institutions.
- Mutual funds are not insured by the FDIC because they do not qualify as financial deposits and carry a certain amount of risk that the investor opts in to bear.
- The FDIC only insures deposits such as your checkingaccount, savings account, money market deposit accounts, certificates of deposit (CDs), money orders, cashiers' checks, and business accounts.
Which Types of Assets Are FDIC Insured?
The FDIC only insures deposits, not investments. This means the following accounts are probably all insured unless your financial institution has declined FDIC coverage (which is unlikely):
- Checkingaccount
- Savings account
- Money market deposit accounts
- Certificates of deposit (CDs)
- Money orders
- Cashiers' checks
- Business accounts, which are afforded the same coverage as individual accounts
What Is Not FDIC Insured?
Investment vehicles are typically not insured by the FDIC. In addition to mutual funds, this includes investments in stock and bond markets, annuities, life insurance policies, and Treasury securities. Even the stocks, bonds, orother vehicles that you might have purchased through your bank's investment department are not insured.
There is often some confusion when it comes to money market mutual funds because money market deposit accounts are FDIC-insured. The difference between these two types of accounts lies in their respective risk levels. While it is technically possible, though unlikely, to lose your original investment in a money market mutual fund, money market deposit accounts generate interest but carry no risk to your deposited funds.
Individual retirement accounts (IRAs) are another common source of confusion. IRA savings can be invested in several different ways, some insured by the FDIC and some not. If a given type of account is FDIC-insured when it includes regular funds, it is also insured when those funds are part of an IRA. IRA funds deposited in a standard savings account or money market deposit account, for example, are insured. Any IRA savings invested in mutual funds or stocks are not.
Why Are Mutual Funds Not Insured?
Mutual funds, like investments in the stock market, are not insured by the FDIC because they do not qualify as financial deposits.
The goal of the FDIC is to ensure another financial crisis does not bankrupt the citizenry. When banks failed during the Great Depression, individual depositors were unable to withdraw their funds because the banks did not have the cash to back up all their deposits. Poor business practices on the part of the banking industry ended up costing millions of innocent Americans their life savings. Prior to 1933, there were no federal protections in place to prevent injustice. The aim, therefore, of the U.S. government in creating the FDIC was not to protect Americans from ever losing money, but rather to protect them from losing money through no fault of their own.
Unlike checking or savings accounts, mutual funds and other securities carry a certain amount of risk. While some amount of risk may be necessary for big profits to be made, investors know going in there is a chance they could lose everything. This is why the FDIC does not insure investments.
Investing is high-tech gambling. While you expect an insurance company to reimburse you if your insured property is stolen from your home, you do not expect a casino to reimburse you if you lose money at the poker table. Allgamblers knowthe risk of loss as soon as they setfoot on the casino floor;the same should be true of investors.
Securities Investor Protection Corporation
Though no entity insures you against investment loss due to market fluctuation, the Securities Investor Protection Corporation (SIPC) does protect investors from loss if their brokerage firms fail. Customers of SIPC-member institutions who lose money as a result of company liquidation are insured up to $500,000, with a $250,000 cash sub-limit. In addition to mutual fund investments, the SIPC protects investments in stocks, bonds, options, Treasury securities, and CDs.
How to Limit Mutual Fund Risk
Of course, not losing your capital in the first place is always better than any insurance policy. Luckily, there are ways to invest in mutual funds without incurring too much risk, all but eliminating the need for federal protection.
One of the chief benefits of mutual funds is their customizability. Most fund managers offer portfolio options that cater to a wide range of investing styles. While stock funds tend to be higher risk, they also carry a greater chance for big profits. However, if you are looking to minimize risk, stock funds are not your best bet.
On the other end of the spectrum are money market mutual funds, which invest only in short-term debt securities, such as government and municipal bonds. These types of investments do not generate huge returnsbut are backed by the reputation and credibility of the U.S. government, making them highly stable. Often referred to as cash equivalents, money market funds are a great alternative to standard savings accounts.
If you are slightly more risk-tolerant but not yet ready to take on the volatility of a stock fund, you can likely find a bond or balanced fund that meets your risk requirements. Bond funds include a variety of corporate and government bond investments. While they are slightly riskier than money market funds, most bond funds are generally considered safe, stable investments. Balanced funds are the most customizable of all because they include both stock and bond investments in a wide range of ratios. This means you can easily find a balanced fund that has just the right amount of risk for your investment style.
The Bottom Line
Though it is not the same as an FDIC safety net, a little research and some careful planning can enable you to invest in mutual funds with confidence, knowing you minimized risk while still putting your money to work.
FAQs
Products such as mutual funds, annuities, stocks, bonds and U.S. Treasury securities are not deposits and, therefore, are not protected by the FDIC. Mutual funds, stocks and bonds also are subject to investment risks, including the possible loss of principal, even if you bought them from your FDIC-insured institution.
Are mutual funds insured by the FDIC? ›
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank.
Why are investment accounts not FDIC-insured? ›
Why Are Mutual Funds Not Insured? Mutual funds, like investments in the stock market, are not insured by the FDIC because they do not qualify as financial deposits. The goal of the FDIC is to ensure another financial crisis does not bankrupt the citizenry.
Why are mutual funds not risky? ›
Mutual funds tend to be less risky than individual stocks, because they are more diversified — meaning they contain a mix of investments.
Why are mutual funds safer? ›
All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.
How much are mutual funds insured for? ›
The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.
Are Fidelity mutual funds FDIC-insured? ›
Fidelity is not a bank and brokerage accounts are not FDIC-insured, but uninvested cash balances are eligible for FDIC insurance. Balances above $3 million may be placed in a non-FDIC insured money market fund, which earns a different rate. See details in Learn more section below.
What is the safest type of mutual fund? ›
Large cap funds that invest in large cap company stocks i.e stocks of well-established companies with sound financials are considered to be the least risky because these stocks are considered to be safer than stocks of mid cap and smaller companies.
Why are 401k not FDIC-insured? ›
If the FDIC were to begin insuring investments in 401(k) accounts, it would lead to excessive risk-taking and distortion of asset prices. This would undermine one of the primary mechanisms of financial markets—price discovery.
What isn't FDIC-insured? ›
Investment products that are not deposits, such as mutual funds, annuities, life insurance policies and stocks and bonds, are not covered by FDIC deposit insurance.
Vanguard Marketing Corporation is a member of SIPC, which protects its members for up to $500,000 (including $250,000 for claims for cash).
How do you avoid FDIC limits? ›
Open accounts with different ownership categories
Since the FDIC limit is $250,000, $50,000 of your money isn't insured because you are the only depositor. One way to insure all of your money is to open accounts with different ownership categories.
Is FDIC necessary? ›
Deposit insurance is one of the significant benefits of having an account at an FDIC-insured bank—it's how the FDIC protects your money in the unlikely event of a bank failure. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
What is the biggest problem with mutual funds? ›
Fluctuating returns: Mutual funds do not offer fixed guaranteed returns in that you should always be prepared for any eventuality including depreciation in the value of your mutual fund. In other words, mutual funds entail a wide range of price fluctuations.
Why are people against mutual funds? ›
Mutual funds are tax inefficient.
When investors pull money out of the fund, the fund manager may need to sell stocks at a higher price than the purchase price, realizing capital gains. Mutual funds must distribute these capital gains to fund holders by year-end.
Is there a high risk with mutual funds? ›
Although mutual funds are generally considered a reliable investment, there are high-risk and low-risk categories within it as well. Investors with a lower risk tolerance benefit from a strategy that ensures security and optimal gains in the short term.
What is the most stable fund? ›
Money market mutual funds are among the safest investment products, since they typically invest in short-term, liquid securities. 14 Keep in mind that money market mutual funds are different from money market accounts. The latter are eligible for FDIC insurance, which means they are essentially risk-free.
Can a mutual fund go to zero? ›
Theoretically, any investment can reduce to zero. So, if you have invested in stocks and one company goes bust, then the value of your investment in those stocks becomes zero. That is the risk of investing in equities.
Why are mutual funds better than insurance? ›
However, the returns are low. A mutual fund allows diversification meaning investors can spread out their investment to restrict exposure to a particular type of asset. Life insurance does not offer the diversification option if they invest their money in one plan.
Are mutual funds still worth it? ›
Mutual funds may be a good investment for anyone looking for diversification in their portfolios. Learn whether mutual funds can be the right investment for you. Mutual funds offer diversification and convenience at a low cost, but whether to invest in them depends on your individual situation.
Mutual Fund Schemes are not guaranteed or assured return products. Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.
Are mutual funds guaranteed? ›
Mutual funds given those bought through a bank -- are not guaranteed and are not insured. As with any investment, mutual funds always carry a risk. Depending on the type of investment objectives the fund has set, some types of funds may carry more risk than others.
Is Fidelity no longer FDIC insured? ›
Your Cash Balance while held by Fidelity and in transit to or from a Program Bank is not FDIC-insured but is covered by SIPC. For more information regarding FDIC insurance, please consult fdic.gov. For more information regarding SIPC coverage, including the SIPC brochure, please consult sipc.org or call 202-371-8300.
Is Merrill Lynch not FDIC insured? ›
Is my account insured? Your brokerage accounts are not FDIC insured, but rather accounts held with Merrill are SIPC insured. SIPC insurance covers your account up to $500,000 in equity with up to $250,000 in cash.
What is the safest fund at Fidelity? ›
Fidelity Balanced Fund (FBALX) While no mutual fund is risk-free, one of the safer Fidelity funds is this balanced fund, which carries average risk vs. the above-average risk seen with the typical stock fund. About 60% of its holdings are in stocks, with the rest in bonds and other debt securities.
What is the safest investment for seniors? ›
What is the safest investment for seniors? Treasury bills, notes, bonds, and TIPS are some of the safest options. While the typical interest rate for these funds will be lower than those of other investments, they come with very little risk.
Which is better than mutual funds? ›
ETFs can be more tax-efficient than actively managed funds due to lower turnover and fewer capital gains. ETFs are bought and sold on an exchange at different prices throughout the day while mutual funds can be bought or sold only once a day at one price.
What investments are better than mutual funds? ›
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds.
Is Roth IRA not FDIC insured? ›
FDIC Coverage Limits
The same limits are applied for checking and savings accounts held at FDIC-insured financial institutions. The FDIC also offers insurance protection up to $250,000 for traditional or Roth IRA accounts. Again, all your IRAs are combined for insurance purposes.
Can an IRA be FDIC insured? ›
Each owner is insured for up to $250,000 for all IRAs held at the same IDI.
The FDIC adds together all retirement accounts listed above owned by the same person at the same insured bank and insures the total amount up to $250,000.
Can a bank operate without FDIC? ›
The Federal Deposit Insurance Corporation (FDIC) is an independent federal government agency which insures deposits in commercial banks and thrifts. Federal deposit insurance is mandatory for all federally-chartered banks and savings institutions.
Is it good to be FDIC-insured? ›
If your federally insured bank fails, Federal Deposit Insurance Corp. insurance keeps your money safe. The FDIC insures up to $250,000 per depositor, per institution and per ownership category. FDIC insurance covers deposit accounts and other official items such as cashier's checks and money orders.
Are brokerage accounts safer than banks? ›
While bank balances are insured by the FDIC, investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails.
Who is better Fidelity or Vanguard? ›
Fidelity and Vanguard both do a good job keeping costs fairly low, but Fidelity has a slight edge overall. Both brokers charge zero commission for stock and ETF trades, but Fidelity charges $0.65 per contract on options trades, while Vanguard charges $1 per contract for customers with less than $1 million in assets.
Which investment firm is best for retirees? ›
Best Brokers for Retirement Plans in 2023
- Best Overall: Fidelity Investments.
- Best for the Self-Employed: Charles Schwab.
- Best for Low Cost: Vanguard.
- Best Robo-Advisor: Betterment.
There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds).
Are Vanguard mutual funds FDIC-insured? ›
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
How are mutual funds protected? ›
Money market mutual funds, often thought of as cash, are protected as securities by SIPC. SIPC protects cash held by the broker for customers in connection with the customers' purchase or sale of securities whether the cash is in U.S. dollars or denominated in non-U.S. dollar currency.
Is Fidelity no longer FDIC-insured? ›
Your Cash Balance while held by Fidelity and in transit to or from a Program Bank is not FDIC-insured but is covered by SIPC. For more information regarding FDIC insurance, please consult fdic.gov. For more information regarding SIPC coverage, including the SIPC brochure, please consult sipc.org or call 202-371-8300.
FDIC Coverage Limits
The same limits are applied for checking and savings accounts held at FDIC-insured financial institutions. The FDIC also offers insurance protection up to $250,000 for traditional or Roth IRA accounts. Again, all your IRAs are combined for insurance purposes.
Can an IRA be FDIC-insured? ›
Each owner is insured for up to $250,000 for all IRAs held at the same IDI.
Which Fidelity funds are FDIC insured? ›
What is eligible for FDIC insurance at Fidelity?
- The Fidelity® Cash Management Account.
- Certain eligible Fidelity retirement accounts such as Traditional, Rollover, and SEP IRAs; Fidelity Roth IRAs, Fidelity SIMPLE IRAs.
- Fidelity Health Savings Account.
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
Are Merrill Lynch investments FDIC insured? ›
Secure your investment¹
CDs purchased through Merrill are insured by the FDIC up to a maximum of $250,000 for both principal and interest, per depositor, for all deposits held in the same capacity per depository institution.
Can a mutual fund go bust? ›
In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
Are mutual funds always safe? ›
Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.
Can you break a mutual fund? ›
You can either do so from the comfort of your home through the Asset Management Company's online portal or if you invest through a broker, you can visit the office closest to you or go onto their website to request a withdrawal.
