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 do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
Related Articles
  1. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  2. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  3. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  4. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  5. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  6. Investing

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  7. Investing

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.
  8. Financial Advisor

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  9. Financial Advisor

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
RELATED TERMS
  1. Redemption Fee

    A fee collected by an investment company from traders practicing ...
  2. Run On The Fund

    A situation in which a hedge fund faces an increasing amount ...
  3. Redemption

    The return of an investor's principal in a fixed income security, ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  5. Redemption Suspension

    A provision on a hedge fund preventing the withdrawal from the ...
  6. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center