Understanding Mutual Fund Exit Fees: What You Need to Know

A mutual fund's exit fee is a charge that is incurred when an investor sells their shares of a mutual fund. Here are the basics of the exit fee and how it can impact your investment decisions.

The Exit Fee

The exit fee of a mutual fund is also known by the terms "back-end load" or "redemption fee". Regardless of what you call it, it means that you will have to pay the mutual fund a certain percentage in order to cash out your shares. Most of the time, this type of fee will be eliminated if you hold your shares for a certain amount of time. At that point, you can cash in the shares without any type of penalty or charge.

Investment Impact

This fee is put into place in order to protect long-term investors in the mutual fund. Since transaction costs associated with the fund are split evenly among all the investors, you do not want people purchasing shares and selling them a short time later. Therefore, this encourages long-term investment and helps limit transaction costs.

If you are considering selling your shares in a mutual fund, you will have to consider the exit fee first. If you are close to the expiration date on the fee, you need to wait until after that date to sell your shares.