A Dirty Little Secret: Mutual Fund Redemption Charge
Mutual funds are the best, and easiest, investment a novice or veteran investor makes. A mutual fund is commonly composed of stocks and bonds designed to give diversity and achieve the goals of the company as well as that of the client.
Unfortunately, mutual fund investing is fast becoming unfriendly to the little guys. Lately companies are extensively imposing mutual fund redemption charges, whether you invest on your 401k, small funds, big fund, or even no load funds.
Mutual Fund Expenses
Like any other investment, mutual funds have expenses. The operating costs include commissions your mutual fund is paying when it trades stocks, management fees, overhead costs as well as your broker's commission.
Mutual fund redemption charges are implemented when you decide to sell your mutual fund before the end of the period. Do you know what a time deposit is? Well, a mutual fund is like a time deposit, where in you agree to "lend" your money to the bank for a specific time in return for a particular interest rate.
If you pre-terminate (meaning you withdraw your money before the stipulated date) then you will be charged a pre-termination fee. The principle is the same for mutual funds, except that the pre-termination fee is called a mutual fund redemption charge. The redemption charge is true for all kinds of mutual funds even the no load funds.
The reason brokers and companies give for imposing mutual fund redemption charge is explained ambiguously at best. The real motive behind the redemption charge is to actually discourage you from selling your mutual fund before the specified date.
The Real Reason Behind It
Actually, the mutual fund redemption charge problem arose when companies permitted hedge funds to cut in and out of the mutual fund. This moving in and out usually just takes days. The dilemma began because most mutual fund companies assert in their prospectuses that they do not tolerate this sort of activity, when in fact they do consent to these actions secretly when the investor is a privileged client.
Due to this moving about of Hedge funds, the SEC has mandated that mutual fund redemption charge be instigated within five days of fund purchase. Sadly, fund administrators are grabbing this chance and making redemption charge as a smoke screen to line their pockets.
Fund executors are now saying that redemption fees are mainly charge for abruptly ending your mutual fund; when the real reason is that managers do not want you to sell their fund because as the mutual fund grows "older" so does its expenses and the outflow is actually towards the managers wallet for the managing of your funds.
