What Is the Procedure for Redemption of Units in a Mutual Fund?

by Mike Parker

A mutual fund is an open-end investment company that pools the funds from a number of investors and uses those funds to purchase securities and other assets that are consistent with the mutual fund's investment objective. Each unit, or share, of the mutual fund represents an equal level of ownership in all of the securities and assets owned by the mutual fund. One significant benefit of owning shares of a mutual fund is liquidity. You can redeem your mutual fund shares on any business day.

Redemption

The share price for a mutual fund is determined by its Net Asset Value, which is typically updated once per day after the market closes. Unlike stocks that trade in a double auction market on stock exchanges, you cannot sell your shares of a mutual fund on the open market. You must sell them back to the mutual fund company, and by law the mutual fund company must be ready to purchase back their shares on demand on any business day, according to the Investment Company Institute. The common term for selling your shares back to the mutual fund company is redemption.

Direct Redemption

You may redeem your mutual fund shares by dealing directly with the mutual fund company. There are a variety of methods at your disposal, which are typically addressed in the fund's prospectus. You may submit a request for redemption of your funds in writing by filling out the mutual fund redemption form, which is usually included with your prospectus, and mailing it to the mutual fund. Some mutual funds allow you to request redemption of your shares online through the fund's secure website. You may be able to call the fund's shareholder services department and request redemption. Your shares will be redeemed at their current Net Asset Value and the proceeds either mailed to you in the form of a check or deposited into a designated account.

Through Your Broker

If you purchased your mutual fund shares through an investment broker, you can usually request redemption of your shares through the same broker. Proceeds from the redemption of your shares will either be transferred into your designated brokerage account, or you may receive a check. Your investment broker may charge a fee for this service.

Considerations

While mutual funds offer investors the twin benefits of professional management and diversification of funds, they are not without risk. There is no guarantee that you will redeem your shares for a higher price than you paid for them. You may lose some or all of your investment. If you redeem your mutual fund shares for a higher price than you paid for them, you may have a taxable capital gain. Some funds include a back-end load, or sales charge, that is triggered if you sell your shares within a specified time frame. Make sure you understand all charges and fees prior to redeeming your shares.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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