Understanding Credit Default Swaps in Mutual Funds: What You Need to Know
It is not likely your mutual fund holds credit default swaps (CDS) if you are invested in a conservative fund. The majority of mutual funds are conservative, made up of stocks and bonds. However, some funds will include derivatives, and this is where you may run into the risk of credit default swap exposure.
What is a Credit Default Swap?
A swap of any financial instrument means Party A trades the income of one of its financial instruments to Party B in exchange for the same. For example, a person holding a bond paying 5 percent over 10 years can trade with a person holding a bond paying 10 percent over 5 years. With a credit default swap, Party B only gets the payment if a "qualifying event" occurs. Typically, this is a default, foreclosure or restructuring of a loan contract.
What are the Risks of CDS Exposures?
CDS's bet that a loan will go bad. If the loan goes bad, the borrower begins payments to the owner of the swap instead of to the initial lender. The problem is, some of these borrowers are completely unable to make the payments, meaning the debt is forgiven in a bankruptcy court or otherwise worthless. Party B is holding a worthless, toxic asset, while trading out payments of a better asset to Party A.
-
Foreign Tax Credit for Mutual Funds: A Comprehensive Guide
If you pay a mutual fund tax on shares you own in a foreign fund, you may be eligible for a tax credit. This credit is applied to the income tax you would owe to the IRS, and you will not be tax
-
Understanding Cash Equivalents in Mutual Funds: Risk & Returns
To protect against too much aggregate risk, most mutual funds do hold some degree of cash equivalents. This category of investments, called cash and cash equivalents (CCE) formally, describes sh
Public investment fund
- Mutual Fund Rebalancing: A Guide to Maintaining Portfolio Balance
- Understanding Mutual Fund Redemptions: A Comprehensive Guide
- Understanding Your Mutual Fund Holdings: A Key to Informed Investing
- Mutual Fund Reclassification: Understanding the Impact on Investors
- Understanding Your Mutual Fund Shareholder Report: Key Information
- Understanding Mutual Fund Liquidity: How Easily Can You Access Your Investments?
- Understanding Mutual Fund Management: Who's in Control?
- Understanding Your Mutual Fund Choices: A Comprehensive Guide
- Overdiversification in Mutual Funds: Risks & How to Avoid Them
-
Understanding Your Mutual Fund Prospectus: A Comprehensive Guide
The mutual fund prospectus is a very important financial document for investors to be aware of. If you are an investor in a mutual fund, you need to make sure that you read your mutual fund pros...
-
Understanding Mutual Fund Fees: A Guide for Investors
Understanding the different mutual fund fees that are commonly charged can help you become a more effective investor. You should be able to look at different mutual funds and compare the fees in...