Mutual Fund Redemption Fees: Understanding and Avoiding Timing Penalties

The redemption fee of a mutual fund is designed to curtail investors that try to time their investments. Here are the basics of the redemption fee and whether or not it is ultimately beneficial to mutual fund investors.

The Redemption Fee

The redemption fee in a mutual fund is a fee that is charged if a share of the mutual fund is sold within a certain period of time after being purchased. For example, a mutual fund might have a 30 day period in which you must hold your shares or be assessed a fee when you sell them. This prevents investors from buying and selling shares of mutual funds rapidly in order to take advantage of short-term price movements.

Impact on Investors

While this type of the might be unpopular with investors that try to time the market, ultimately this is a good thing to have for other investors. When you invest in a mutual fund, everyone has to bear the burden of transaction costs equally. Therefore, if you plan on holding your shares of a mutual fund for the long-term, you do not want someone coming in and then immediately getting out frequently. This will raise the costs that are associated with this investment and make it less profitable for you.