How will bankruptcy affect my shares?

Past accounting scandals and bankruptcies at leading companies in the United States caused some concerns among investors in mutual funds during the early part of the decade. As a result, share owners became increasingly worried that their fund managers may have purchased a high number of common stock shares of one company causing fund share prices to drop substantially as that company's stock price dropped.

Fortunately, fund companies, such as the State Farm Mutual Fund Trust, are regulated by the Investment Company Act of 1940. In order for a fund (other than a money market fund) to qualify as "diversified", 75% of the fund's portfolio must be invested in such a way that no more than 5% of the total portfolio is invested in any one company. The 1940 Act also stipulates that the 5% cannot control more than 10% of that company's outstanding stock. The remaining 25% may be invested in any way as long as it complies with the fund's investment objectives and strategies. It would be possible to invest the entire 25% in one company. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

Money market funds have even more stringent guidelines than other mutual funds. The State Farm Money Market Fund must invest its assets so that no more than 5% are invested in any one company. The assets may only be used to purchase short term securities (13-months or less to maturity) such as commercial paper, repurchase agreements and negotiable CDs. Money market funds are limited to purchasing securities that are rated highly by a nationally recognized statistical rating organization.

This is not to say that the financial difficulties of one company, country, and/or sector will not affect the net asset value of a fund. The difficulties in one sector of the economy may cause a ripple affect that creates a downturn of the securities markets in general, just as technology stocks contributed to market decline in 2001. However, by investing in a diverse portfolio, our managers attempt to minimize the affects of any downturn in any particular company, country, and/or sector. It is important to note that diversification does not assure a profit or protect against loss in a declining market.

Although money market funds are considered less risky than other mutual funds, investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

If you are investing in international markets, you should realize that your investment involves certain risks not typically associated with investing in the United States including foreign currency fluctuations and economic or political risks. Investing in smaller companies also presents a greater risk of loss than an investment in large companies.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 269 KB) .

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AP2007/12/9679