As charges of illegal trading pile up, what are investors supposed to do? Are all mutual funds tainted? Could yours go belly-up? Should you bail out? First of all, don't panic. Most of the roughly 650 firms that run mutual funds have not been accused of doing anything wrong. When the investigations are over, many will be proved entirely trustworthy. And as for funds run by companies that are found guilty, there are limits to how low they can go. By law, a mutual fund can never go bankrupt. It cannot become insolvent unless all the stocks and bonds it owns go to zero (and not even a cheating manager can make that happen). Even if punitive fines put the managers out of business, the fund itself would bear no liability for their wrongdoing, and the value of its investments would be unaffected. So your money is not at risk.
But that does not mean you should leave your money where it is. If you're sticking around to cash in on the "restitution" that the fund companies have promised to pay for any damage their misdeeds caused, forget it. "After the lawyers get through with it," says John Bogle, the founder of the Vanguard funds, "I'd be surprised if anybody gets more than a penny per share."
Here's what to do if regulators have accused your company of improper conduct:
--If you paid your broker a load, or sales commission, when you bought the fund, you should bail only if doing so will not trigger a back-end, or deferred, charge. *Contact the fund and ask for your "cost basis." If it is higher than your current account value, you can sell without owing any capital-gains tax.
--If you own an ethically challenged fund in a retirement account--where there's no tax hit for cashing out--you should make your move. Switch to a low-cost firm like Vanguard, Fidelity or T. Rowe Price. If your old fund company cleans up its act, you can always move back. But for now, why take chances? --By Jason Zweig