Generally, an investor can sell a mutual fund when the purchase has settled. However, restrictions vary by fund and usually they charge a redemption fee if the shares in the fund are not held for a minimum period. This minimum time, as well as the redemption fee, also varies by fund. Mutual funds are not designed for buy-and-sell traders but for investors seeking products that they intend to hold for the long-term. Contrastingly, some brokerage firms and investment companies permit mutual fund share owners to trade funds within the same family without penalties.
Built for Long-term Investing
Because shares in mutual funds appeal more to the long-term investor, day traders and individuals who seek to buy low and sell high regularly are much more inclined to deal with other investment products, such as stock shares. When buying and selling mutual funds on a regular basis, the investor will lose a significant percentage of any profits through sales charges, redemption fees and management expenses. Therefore, although open-end mutual funds will redeem shares at the investor's request, fast selling is not a profitable scheme in mutual fund investing.
Cuts in Profits
A commission charged by the investment company upfront, often labeled a sales charge, may initially take 5 percent from the investment. For example, a $1,000 investment with a 5 percent sales charge leaves $950 for purchasing shares. Subsequently, if the investor sells the mutual fund shares during the short-term, she will likely pay a redemption fee, deducted from the sale. If the redemption fee is 0.5 percent, the return must equal 5.5 percent in this example simply to break even, disregarding management expenses. However, may open-end no-load funds charge no fees for buying or selling, provided the shares are held for the minimum time required.
Next Day Prices
Selling a mutual fund is not always a quick transaction, i.e., it does not take effect immediately, like selling stocks shares generally do during the trading day, but may be based on the closing price for the following day. For example, suppose an investor wants to sell 100 shares of a fund Wednesday. The net asset value (NAV) quoted for Wednesday, which is based on Tuesday prices, is $12.00. A sell order is placed during market hours Wednesday. However, at the close of trading Wednesday, the NAV is readjusted and reconciled with the assets the fund owns. Suppose the NAV has dropped to $11.73, a decrease of two and one-quarter percent. The sell order could be processed at $11.73 and the seller will suffer the loss.
Redemption Fee Examples
Scottrade redeems mutual fund shares one day after the trade has settled. Still, with few exceptions, they impose a redemption fee on the sale of shares not held for 90 days. Charles Schwab also charges a fee for mutual fund shares sold before a 90-day period. Fidelity imposes a 180-day holding period to avoid redemption fees and Vanguard's popular index funds do not charge redemption fees for selling shares of the mutual fund itself, but may pay the investor in securities that in turn does cost the investor for applicable brokerage fees on the sale of the securities. By discouraging the quick buying and selling of shares, a mutual fund can prevent traders from influencing share prices through heavy volume of demand.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.