Exchange Privilege

What is an 'Exchange Privilege'

Exchange privilege is the opportunity given to mutual fund shareholders to exchange their investment in a fund for another within the same fund family. This privilege can be utilized for a number of market strategies.

BREAKING DOWN 'Exchange Privilege'

Exchange privileges can be utilized by all types of investors and are especially useful for do-it-yourself investors. Exchange privileges allow an investor to exchange ownership from one mutual fund to any other mutual fund in the fund family. Some investors may choose to utilize this privilege in their overall investing strategy which can be more easily deployed when setting up a family of funds account.

Family of Funds

Setting up an account with an open-end mutual fund company can be a great way to build a portfolio of diversified mutual funds at a low cost. All open-end mutual funds are transacted through the fund company rather than on exchanges. Therefore, mutual fund companies allow investors to setup individual funds and buy and sell mutual funds directly with the fund company. Sales charges are typically waived when using this approach. A fund family account can also allow investors to take full advantage of all that the fund family has to offer. Exchange privileges are also allowed outside a fund family account however they may be more difficult to deploy.

Operational Expectations

Exchange fees on fund family exchanges are typically very low and many fund companies will not charge exchange fees at all. In some cases there may be a limit to how many times an investor can switch funds within a year. When exchanging funds an investor can move from one share class within the fund to another share class within the same fund. They may also exchange from one fund into any other fund in the fund family. In doing so they exchange their total shares for the same amount of shares in another fund. Investors should be aware that this could trigger a tax if a capital gain occurs.

Operational procedures for fund exchanges vary by fund company. Often investors will need to speak with a fund representative directly to initiate the exchange of funds.

Exchange Privilege Strategies

Exchange privileges can help an investor in many ways. One, they can use the exchange privilege for rotational strategies which follow market conditions. In rotational strategies an investor can rotate into and out of different funds to preserve capital and take advantage of market changes offering potential capital appreciation opportunities. A second way exchange privileges can be useful is for investors approaching retirement. Exchange privileges allow an investor to exchange out of higher risk funds and into more conservative funds as an investor approaches retirement. These strategies are often utilized by do-it-yourself investors and can reduce some of the costs involved with full service advice.