Investment Companies - Buying and Redeeming Mutual Funds

Mutual fund shares are a continuous public offering as defined by the SEC. All sales must be accompanied by a prospectus. Because of the continuous offering nature of mutual fund shares, a rule called Regulation T prohibits the purchase of mutual fund shares on margin.

An investor can redeem fractions or whole shares of a mutual fund by selling them at the NAV. When will the redemption price be determined? At the same time that the fund company computes the daily NAV for the fund and determines at what price investors purchased shares after the close of trading yesterday or before the close of trading today, or 4pm.

Mutual fund companies must pay the proceeds of the redemption amount to the investor within seven calendar days.

Look Out!
You will need to know the time within which an investment company has to forward the proceeds of the mutual fund redemption to the investor. Do not confuse this time period with stock or bond settlement, and remember: CALENDAR days, not business days like other securities!

Offers of Exchange
Section 11 of the Investment Company Act of 1940 requires offers of exchange to be made at NAV only. This applies to exchanges within a single fund family and to exchanges from one fund family into another. The only exception to this rule is if the terms of the offer have been submitted to and approved by the SEC.

Distribution, Redemption and Repurchase
Section 22 of the Investment Company Act of 1940 requires the following for investment companies:

  • They must determine a method for computing the minimum price at which a member of a securities association may purchase shares.

  • They must prescribe the minimum time period that must pass after the sale or issue of shares before any resale to the investment company by a member or its redemption upon surrender by a member.

  • No investment company can sell any redeemable security it has issued at any price except the public offering price, except to or through a principal underwriter for distribution.

  • A securities association may prohibit its members from purchasing redeemable shares from the issuer except at a price equal to the public offering price minus a commission, spread or discount.
Related Articles
  1. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  2. Stock Analysis

    How Is Walmart's Pharmacy Business Performing?

    Learn how Wal-Mart started its pharmacy business in 2006 and rose to be the fourth-largest U.S. drug store chain in 2014 but is struggling financially in 2015.
  3. Stock Analysis

    Under Armour's Plan to Double Revenue

    Learn how Under Armour plans on doubling its revenue by 2018. Find out what areas the company plans to count on for this growth and its record streak.
  4. Entrepreneurship

    4 Things to Know About Your Company To Make a Successful Pitch to Investors

    Learn how to make a successful pitch to investors. Regardless of your industry, size or market, there are some questions all investors need to have answered.
  5. Home & Auto

    Economics of Owning a Rental Property

    Learn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.
  6. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  7. Investing News

    Should You Invest in Disney Stock Before Star Wars?

    The force is strong with Disney stock, as it continues to make gains going into the launch of EP7. But is this pricey stock a good buy at these levels?
  8. Entrepreneurship

    Top 4 Billionaires Living in Los Angeles

    Learn how these multibillionaires built their fortunes to stand out from the crowd of the countless ultra-rich who call Los Angeles home.
  9. Economics

    Will Winter Affect the Price of Oil and Gas?

    Learn how heating oil and natural gas prices are affected during a harsh or mild winter and the EIA's prediction for heating consumption.
  10. Investing

    10 Cheap Vacations for the Ultimate Foodie

    If you are a foodie then explore one of these destinations in 2016.
  1. Elastic

    A situation in which the supply and demand for a good or service ...
  2. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
  3. Skinny Down Distribution

    Skinny down distribution is corporate practice of slimming down ...
  4. Education Loan

    Money borrowed to finance education or school related expenses. ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  6. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans – ...
  1. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
  2. Is it possible to get a free credit report from Equifax?

    It is possible to get a free credit report from Equifax, as well as the other two major credit bureaus, Experian and TransUnion. ... Read Full Answer >>
  3. How can you cancel your Walmart credit card?

    Walmart offers two types of credit cards: the Walmart MasterCard and the Walmart credit card. How to Close Your Walmart Credit ... Read Full Answer >>
  4. Does renters insurance cover water damage?

    An all-perils renters insurance policy does cover water damage, less the deductible, to personal property if the damage is ... Read Full Answer >>
  5. Can Netspend cards be used internationally?

    NetSpend cards can be used internationally, and they are accepted at any location that accepts debit Visa or MasterCard. ... Read Full Answer >>
  6. Is Chile a developed country?

    As of 2015, Chile is the only country in Latin America that is generally recognized as a developed country. In 2010, the ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center