The short answer is yes. If a mutual fund or exchange-traded fund (ETF) becomes unprofitable, fund company management may choose to shut it down. And given how competitive the fund market is, with well over ten thousand funds available today, this happens more often that you might think.

What are the risk factors? One of the biggest is whether or not the fund is actively managed. If you’re not familiar with the terms, a passive fund is one that tracks some asset class index such as the S&P 500 or the Bloomberg Aggregate Bond Index. An active fund is one in which management attempts to beat some index by actively trading a subset of the index’s securities or by using derivatives to amplify the index’s returns.

Fund companies launched 571 active funds last year but shut down 436, based on Morningstar data as reported by Daniel Gil in Financial Advisor IQ. Of all the active funds created since 2014, nearly half are gone today. A key factor associated with fund survivorship is its ability to attract money from investors. According to Gil, Fuse Research suggests $50 million in assets under management is a common threshold. But the higher management fees generally charged by actively managed funds could be one reason that so many were unable to achieve the needed level of growth in the time frame required by the fund company.

Besides fund size and active vs. passive management style, another risk factor to look for – especially with ETFs – is trading volume. That’s a good indicator of investor interest and a key component of liquidity. So-called thinly-traded ETFs are not only subject to greater volatility but also potential future liquidation if volumes remain low.

Funds focused on narrower market segments can also face more headwinds in reaching profitability. There may be less investor interest due to higher risk and/or less familiarity with the particular segment.

But even if you’ve been notified that your fund is being terminated, it’s not the end of the world. In some cases the fund company may merge the fund into another existing fund, which might help you avoid being taxed when the fund stops operating. Otherwise you’ll have two choices: sell the fund now or wait for liquidation. If you choose the former you should be able to sell your shares on the open market if it’s an ETF or, for mutual funds, back to the fund company. But the price could become volatile in such a situation.

If you prefer to wait until the bitter end, your final distribution amount will be the net asset value (NAV) of the fund at liquidation multiplied by the number of shares you own. And that is usually a taxable event just as if you sell it.

Despite the large number of fund liquidations over the past ten years, it’s still rare for most investors to experience such an occurrence. Most importantly, don’t let the fear of a remotely possible liquidation keep you from investing in ETFs or mutual funds.

(PERIGON is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).