Understanding Mutual Fund Redemption Restrictions

Mutual fund redemption is a very complex business. With ordinary funds, you expect to replace any money or shares taken from the funds with other shares, The mutual fund, on the other hand, must be handled by the fund manager. The manager will either provide a cash equivalent or they will sell off a number of shares. This makes the mutual fund much more vulnerable because there is such an imbalance between money coming in and out of the account.

Mutual Fund Redemption Restrictions

Because of this vulnerability, there are a number of restrictions that are meant to protect the mutual fund from abuse;. The restrictions are meant to particularly protect the fund from a sudden influx of redemption requests. Most restrictions rely upon the mutual fund to set up certificates for their shares. The owner of the shares will not receive any redemption unless those certificates are handed back to the mutual fund.

Restrictions to Redemption Fees

The redemption fee is now restricted to 2 percent of the redeemed shares. Most mutual funds opt out of the fee altogether and recoup their fee through trading.