Timing is the practice whereby traders try to profit from the short-term differences between daily closing prices. This is done with all types of securities. Whenever investors see the possibility of making a quick profit by buying low and selling high (or vice versa), they can do so.

Now, mutual fund timing is bad for investors in mutual funds because most often, investors are in it for the long term. But, by buying and selling the mutual fund in the short term, traders are increasing the associate costs of the mutual fund and passing these costs onto the long-term fund holders. Trading increases the costs for the long-term mutual fund investor because every time an investor buys or sells units of a mutual fund, the fund company must buy and sell the equal portion of the actual securities within the fund. With each transaction, there is a service charge (i.e. commission). These service charges eat into the returns of the people who are holding the fund for the long term.

Mutual fund companies are aware of the effects of timing and try to prevent it by adding on early-redemption penalties for those investors who redeem their investments before a minimum amount of time. These penalties transfer the costs of the transactions onto the short-term investor.

  1. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  2. Does Fidelity have mutual funds?

    Fidelity offers clients all asset classes of mutual funds, ranging from domestic equity to specialized sectors. The offering ... Read Full Answer >>
  3. How often are mutual fund prices updated?

    A mutual fund's price, or its net asset value (NAV), is determined once a day after the markets close at 4 p.m. Eastern time ... Read Full Answer >>
  4. Can minors invest in mutual funds?

    A mutual fund can be opened under the name of a minor through a custodial account overseen by a guardian. The custodian holds ... Read Full Answer >>
  5. Can mutual funds only hold stocks?

    There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
  6. How do mutual funds compound interest?

    The magic of compound interest can be summed up as the concept of interest making interest. On the other hand, simple interest ... Read Full Answer >>
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