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Mutual fund redemption fee question
Old 08-22-2013, 11:21 PM   #1
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Mutual fund redemption fee question

I am fairly new to mutual fund investing (Roth IRA). Although I have done extensive research on many aspects of mutual funds I have a question I cannot seem to find an answer to. Many funds charge a redemption fee if the shares are sold within a certain time frame (we'll say 30 days for arguments sake). Here's a hypothetical situation to frame my question: I purchase one share in fund "X" today and then purchase another share of this fund a week later. Two weeks after I purchase the second share I sell my entire stake in the fund (31 days after I purchased the first share, but 14 days after I purchased the second share). Will I be charged the early redemption fee on the total value of my investment (i.e. both shares)? Or will I only be charged a redemption fee on the second share that I purchased since I sold within 30 days of purchase?

Just to be clear, I understand the redemption fee will also be charged on any accrued earnings and that mutual funds are not meant to be bought and sold in short time frames. It's just a nagging question that I would like to answer.

Thanks!
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Old 08-23-2013, 06:02 AM   #2
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You would have to look at the details of the prospectus and possibly ask the fund company but I suspect the redemption fee would only be applied to purchase lots that have not been held for the required period.

Think of it this way. If someone buys $1m of a fund and holds it 10 years and then buys another $100k and then sells the entire $1.1m two weeks later, they would not apply a redemption fee to the entire $1.1m, just the $100k.
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Old 08-23-2013, 06:02 AM   #3
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The early redemption fee is assessed against each share that has not met the minimum holding time.
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Old 08-23-2013, 10:08 AM   #4
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From my experience with mutual funds, there are two rules for determining how and if sold shares are subject to an early redemption fee.

(1) FIFO is used. That is, the earliest shares purchased are first used to count against those sold, thus minimizing the chance of anearly redemption fee. This might seem odd if you are using a different cost basis for tax purposes, though. Then again, the brokerage company won't know which cost basis you are using on your tax forms, right?

(2) Only shares you buy with outside money count. Shares bought with reinvested dividends and cap gain distributions do not count. This makes sense because you could have always taken those distributions in cash insetad of buying new shares. So why should you be penalized for not taking them as cash? The brokerage company should love it when you reinvest dividends because they will be able to take their fees on greater investments with them.

Taken together, if you buy $10,000 worth of shares in 2011 then reinvest dividends all the time, then add $5,000 worth of shares last week, then sell $10,500 worth of shares today, it is pretty unlikely you will pay any early redemption fees because rule (1) will apply to the earliest purchased shares and rule (2) will exclude the reinvested dividends which are likely to make up the difference even if they were prchased recently, thereby shielding your recent purchase from the fee.
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Old 08-23-2013, 11:18 AM   #5
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Quote:
Originally Posted by scrabbler1 View Post
From my experience with mutual funds, there are two rules for determining how and if sold shares are subject to an early redemption fee.

(1) FIFO is used. That is, the earliest shares purchased are first used to count against those sold, thus minimizing the chance of anearly redemption fee. This might seem odd if you are using a different cost basis for tax purposes, though. Then again, the brokerage company won't know which cost basis you are using on your tax forms, right?

(2) Only shares you buy with outside money count. Shares bought with reinvested dividends and cap gain distributions do not count. This makes sense because you could have always taken those distributions in cash insetad of buying new shares. So why should you be penalized for not taking them as cash? The brokerage company should love it when you reinvest dividends because they will be able to take their fees on greater investments with them.

Taken together, if you buy $10,000 worth of shares in 2011 then reinvest dividends all the time, then add $5,000 worth of shares last week, then sell $10,500 worth of shares today, it is pretty unlikely you will pay any early redemption fees because rule (1) will apply to the earliest purchased shares and rule (2) will exclude the reinvested dividends which are likely to make up the difference even if they were prchased recently, thereby shielding your recent purchase from the fee.
+1

That's been my experience. It's FIFO, reinvestments don't count. That should be stated in the prospectus.
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