Redemption Fee

When you redeem shares of a mutual fund in a deferred commission purchase structure, there is a charge. Remember that most mutual funds are sold as “A-shares”, meaning that the commission on the fund you are buying is paid up front. That is, if you’ve invested 10 grand with a 3% commission, well, when you step up on the swimming pool starting blocks, and the money is actively starting to be invested, you start with 97% of that 10 grand, or $9,700, with $300 having gone to the broker for the pleasure of selling you that fund.

But some mutual funds are sold as “B-shares” - where there is essentially an exit fee, or rather, where there is a charge when you redeem the fund, either because you just want to sell it or you die and your estate liquidates it or martians kidnap you and force you to call in a sell order.

In many cases, redemption fees are waived if you hold the mutual fund some extended period of time, like a year, a few years, five years, something like that. If you hold the fund an extended period, the annual management fee paid to the people buying and selling securities on your behalf can then cover the commission, so the money managers aren’t actually losing money in the form of that $300 commission paid to a broker who sold you 10 grand of the fund, only to have you three weeks later dump it and move on.

There are other benefits in having this system set up because it encourages more careful selection of mutual funds, and longer duration in holding them and yes, the obvious dating allegories apply. So when you hop in bed with a given mutual fund, read the fine print because all kinds of hidden fee germs exist in bedrooms, airport bathrooms, and glass elevators all around the world.