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.

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.

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%.