Can I sell mutual fund shares below their minimum intial purchase amount without being penalized?

By Richard Loth AAA
A:

Yes. You can freely buy and sell shares of a mutual fund regardless of any requirement for a minimal initial purchase amount or the application of a redemption fee. In this sense, the investment is completely liquid in that investors in any mutual fund have unrestricted access to their money.

However, there are financial consequences for dropping below a fund's minimal balance level and/or triggering a redemption fee. These vary among the different fund companies, and some are more onerous than others.


Let's say that a fund in which you invest has a minimal initial purchase level of $2,500. Subsequent to your initial investment, you sell shares to take money out of the fund and your fund balance drops to $2,400. Generally, fund companies take a look at all fund balances once a year to look for "low balances", to which they will assess a one-time annual fee. In this case, a $10 charge seems to be fairly typical.

Whether you paid a front-loaded sales charge is immaterial. The front-load sales charge goes to the intermediary - your financial planner, investment adviser or brokerage firm - and is immediately deducted from your investment. It's gone, no matter what actions you subsequently take and it has no bearing on the sale of fund shares.

Redemption fees are used with some funds to discourage market timers from adversely affecting a fund's performance. In-and-out trading in mutual funds by speculators is disruptive of fund performance, which generally translates into a negative impact on total return. Fund companies apply redemption fees to funds they feel are susceptible to this activity. They are meant to protect fund investors with longer term interests.

The general fund company practice is to use a 90-day holding period - although this can extend to as much as a year - for a redemption fee. This means that any fund shares sold prior to 90 days after an initial purchase in the fund would be, for example, subject to a 1% charge. Because market timers work with razor thin margins, they are thus deterred from rapid trading of mutual fund investments.


Therefore, if you respect the redemption period, you'll avoid any early redemption penalties.


In this regard, mutual fund investors should pay attention to this bit of related information:
Twenty years ago, the average holding period for a mutual fund was eight years and the average annual total return for this investor was 12%; in 2007, the average holding period is 10 months with an annualized average return of 4-6%. The message here should be very clear.

For related reading, see Long-Term Investing: Hot Or Not?

RELATED FAQS

  1. How is correlation used differently in finance and economics?

    Take a look at the similarities and differences between how statistical correlation is applied in economics as opposed to ...
  2. How is correlation used to measure volatility?

    See how the correlation between an asset and its benchmark index can be used as a proxy to determine the relative volatility ...
  3. How is correlation used in modern portfolio theory?

    Discover how modern portfolio theory and the efficient frontier use correlation between investment assets to predict an optimal ...
  4. What are the advantages of an index fund over an ETF?

    Diversifying a portfolio is one of pillars of investing basics, and an index fund can provide an investor with exposure to ...
RELATED TERMS
  1. Smart Beta

    Investment strategies that emphasize the use of alternative weighting ...
  2. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  3. Account Minimum

    The minimum balance required to be maintained in an investment ...
  4. Capital Growth

    The increase in value of an asset or investment over time. It ...
  5. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  6. Historic Pricing

    A method for calculating the value of an asset using the last ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    The Impact of the Janus Market Timing ...

  2. Mutual Funds & ETFs

    PIMCO vs. BlackRock: Weighing Mega Fund ...

  3. Professionals

    Are Alternative Mutual Funds, ETFs Right ...

  4. Fundamental Analysis

    Is Apple's Stock Over Valued Or Undervalued?

  5. Mutual Funds & ETFs

    How To Minimize ETF Fees

Trading Center