How will the government’s takeover of Fannie Mae and Freddie Mac affect mutual fund shareholders?
Shareholders in money market funds and bond funds may benefit, because the Treasury Department’s action will make funds’ investments in the mortgage giants’ bonds and other debt securities more secure. Shareholders in equity funds that own Fannie and Freddie stock could see further losses in their funds’ values. The Treasury Department’s plan puts existing holders of common and preferred shares first in line to absorb the companies’ business losses. Of course, mutual funds are generally highly diversified across a range of stocks. Therefore, declines in Fannie’s and Freddie’s stock could be offset if the government action builds confidence in the financial markets and other stocks gain in value. Any decline in funds’ net asset value (NAV) is not likely to be precipitate. Funds adjust their NAV every day, and so any earlier declines in the price of Fannie and Freddie shares is already reflected in fund values.
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