What is a Redemption Fee
A redemption fee is a fee charged to an investor when shares are sold from a fund. The fee is charged by the fund company and added back to the fund. A redemption fee may also be known as an "exit fee", “market timing fee”, or “short-term trading fee.” It is typically instituted within a specified timeframe.
BREAKING DOWN Redemption Fee
A redemption fee is one type of fee typically associated with a mutual fund. A redemption fee may be charged by a fund company when an investor sells shares from the fund. Mutual funds are typically part of a long-term investment strategy and are not usually intended for short-term trading or gains from market timing. For this reason mutual fund timing is a legal but frowned-upon practice that usually results in an additional charge for the investor. To discourage short-term trading, fund companies will typically charge a redemption fee within a specified timeframe. Most fund companies use a timeframe of 30 days. If an investor exits the fund within 30 days of their initial purchase then a redemption fee could be charged. In effect, this means that mutual fund timing may be subjected to higher fees occasioned by the transaction costs of the short-term trading of fund shares. Outside of a designated minimum holding period for an investment in a fund, investors typically are not charged for redeeming shares of the investment.
Thus, it is important to be aware of any redemption fees and timeframes that may be associated with them.
The primary reason a redemption fee is needed is to protect other investors from higher transaction costs. Active short-term redemptions lead to two significant issues for the fund manager. One, the fund is required to maintain higher cash positions to accommodate sell orders. Two, short-term trading increases the overall operating costs of the fund. To keep cash positions and operating expenses lower, the fund may enact a redemption fee.
Mutual fund investing can involve numerous fees throughout the investment duration. Other fees involved may include sales loads, 12-b1 fees and account service fees. Investors should ensure they understand all fees involved before buying and selling a mutual fund.
Vanguard mutual funds do not broadly include redemption fees however they are required in some of the fund company’s mutual funds. The Global ex-U.S. Real Estate Index Fund Investor Shares (VGXRX) is one example. This fund has a purchase fee and a redemption fee to support expenses of the Fund. VGXRX charges a purchase fee of 0.25% and a redemption fee of 0.25%.