Selling Mutual Funds: What Happens in Liquidation?

When investors redeem their mutual fund shares, the process is very simple. Mutual fund stocks are not traded during the day. Instead, stocks are priced at the close of 4 pm Eastern Time, when their net asset value (NAV) is calculated. Mutual funds usually keep cash reserves to cover the cost of redemption by investors so that they are not forced to liquidate their portfolio securities at untimely times. For most mutual fund redemptions, the proceeds will be distributed to investors on the next business day.

Redemption of mutual fund shares may have some consequences, but many investors are not aware of these events. Examples of these consequences include fees, fees, commissions, and expenses that reduce investors’ expected returns. All fund fees are described in the fund’s prospectus. It is very important for investors to read the fund’s prospectus to understand all the financial implications before buying, selling or exchanging mutual fund shares.

Mutual fund unit category

Many mutual funds offer multiple types of stocks, such as “A” and “B” stocks. Each share class has the same fund securities, but there will be different fees and expenses. Investors can choose the fee and fee structure that best suits their investment goals.

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Key points

  • When investors sell mutual fund shares, the redemption process is simple, but unexpected fees or expenses may be incurred.
  • Class A stocks usually have a front-end sales load, that is, fees charged when investing, but class B stocks may charge fees when selling stocks.
  • Some mutual funds charge early redemption fees to prevent short-term transactions.
  • Exchange fees are fees charged when investors exchange one mutual fund for another mutual fund with the same fund series.
  • When realizing capital gains through the sale of fund shares in taxable accounts, investors may be required to pay taxes.

Class A stocks usually have a front-end sales burden, which is used by the fund to compensate brokers. Class B stocks have no front-end sales burden, but deferred sales burden fees may be levied when selling mutual fund shares. Class C stocks may have front-end load or back-end load, but these costs are often lower than those of Class A or B stocks.

The typical front-end load cost may be 4% of the initial investment, but it cannot exceed 8.5%. As the size of investor purchases increases, the percentage of front-end load may decrease. The back-end sales load cost cannot exceed 8.5%, and this percentage will decrease over time until it reaches zero. Long-term investors may choose Class B stocks when they expect to hold the fund shares for a long time. All three share classes also impose a series of shareholder fees and expenses.

It is important to note that no-load funds do not charge fees for buying and selling stocks, but like no-load funds, they do charge other fees and expenses that may reduce shareholder returns.

Shareholder fees

Shareholder fees include the operating expenses of the mutual fund, such as investment consulting fees, marketing and distribution 12b-1 fees, and other administrative expenses. 12b-1 Fees are paid from fund assets, which means that investors are paying these fees indirectly. 12b-1 Expenses include the cost of marketing and sales of fund shares, including advertising costs, broker compensation, and printing and mailing of prospectuses and sales materials.

Early redemption fee

Some mutual funds charge early redemption fees to prevent short-term transactions. Generally, these fees are effective for a holding period of 30 days to one year. The early redemption fee is paid to the fund separately from the potential back-end loading fee paid to the broker. The US Securities and Exchange Commission limits redemption fees to a maximum of 2%.

Exchange fee

When shareholders exchange shares in one fund for shares in another fund within the same fund family, mutual funds can levy an exchange fee. The exchange is a taxable event, which means that investors may also be responsible for any capital gains from the sale/exchange of shares.

Tax consequences

Investors holding mutual fund shares in a taxable account may be taxed on any net capital gains realized from the sale of their fund shares during the calendar year. In addition, he may also have to pay taxes on his proportional share of the fund’s capital gains. The law requires mutual funds to distribute capital gains to shareholders if the profits from the sale of securities cannot be offset by losses. These distributions occur near the end of each year.


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