Smarter Money: Those Rats Fleeing the Sinking Fund Ship? They're Hurting You

If you're in a fund that's losing investors, you'll lose money. Cramer shows you how to survive.
By Jim Cramer ,

Sometimes running money has nothing to do with stock picking. It has to do with survival.

You have to figure out what you can sell in order to be able to meet redemptions. It is a much different game from the highly oxygenated one that most money managers have played in the last five years, one of picking stocks and plowing new dollars into them.

It is also a much harder game.

In fact, it is so hard that one of the reasons mutual funds really hate any bad publicity and do their best to obfuscate the benchmarking process is that fund withdrawals usually lead to further declines in net asset value (NAV), which leads to more withdrawals, until the vicious circle finally forces a fund to go out of business.

Why focus on this? Because it is possible that you want to be out in front of it. If your fund has done poorly this quarter and it did poorly last year, it will most likely be dealing with redemptions. You can't call them and ask them this. Only a handful of funds will ever even admit to redemptions. It is all sales-job when it comes to these things, and you can't expect a fund that is fighting for its survival to acknowledge that fact.

But it is happening.

When things are good in the fund business, if you get in early, you get this fabulous bonus of having your stocks taken up by additional assets that are sent to the fund after you. (Does anybody doubt this now that we have seen what some of the mutual funds that concentrate in a few names did at the end of the 1990s?) When things are bad, though, you get a nightmarish scenario where your stocks are being pulled down by your own fund's redemptions.

Most of these funds don't walk around with a lot of cash anyway, so selling will affect their performances.

This vicious maelstrom down is what I am trying to get you out of before it happens. I would use any lift that these funds might give you through the end of the quarter to start pruning now.

Oh yeah, one other thing: The free ride from television and magazines will be over too. Who will put these guys on the cover or the tube with these records? Even journalists who need stories desperately -- and they all do -- won't put these guys on. Marketing won't spend a dime on them either. What is there you can say? A great three-year record ending March 2000? That won't wash.

Why don't you read this kind of advice anywhere else? Is it so kooky or out-there? Nah, I think most writers don't know it. I have seen it from the inside from my years as a manager of funds.

If you don't know how to sell

-- and many of these fund managers don't -- and you are faced with massive redemptions, you will most likely do the wrong thing for shareholders, selling off the good to fund the bad.

Who needs that? Take the loss and get into a fund that will have positive fund flows. If the

Nasdaq

, where many of these bad funds are located, turns, you will catch a move aplenty. If it doesn't, or if this kind of market continues, you will have beaten the other guy out of the door.

Pull your money out of losing funds today. It could get much worse before it gets better for these guys -- if it ever does.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to

jjcletters@thestreet.com.

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