Redemption fee

A redemption fee is a charge some mutual funds apply to investors who sell their shares within a short period after buying them, commonly somewhere in the range of 30 to 90 days, though the exact window varies by fund. It is disclosed in the fund's prospectus and is separate from any sales load, which is a fee tied to the act of buying or selling shares regardless of how long they were held.

The purpose of a redemption fee is to discourage short-term trading in and out of a fund, since frequent buying and selling by some shareholders can raise trading costs for the fund as a whole and force the manager to hold extra cash or sell holdings at inconvenient times to meet redemptions, both of which hurt the returns of shareholders who are holding for the longer stretch. Unlike a sales load, which typically goes to a broker or the fund company as compensation, a redemption fee is usually paid back into the fund itself, offsetting the costs that short-term trading imposes on remaining shareholders.

Because the fee only applies within a defined holding period, it is easy for a long-term investor to avoid entirely simply by holding shares past that window, and it primarily affects investors who try to trade a fund like a stock rather than hold it as a position for years. Checking a fund's prospectus for any redemption fee and its exact time window is worthwhile before making a purchase an investor might want to reverse quickly.