Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Don't Be a Redeemer

Welcome back to another edition of Foolish mutual fund basics. This time, we're leaving behind the back alleys, where multiple share classes rob your returns, for the friendlier confines of fund redemption fees. Ready to get started? Good.

What it is
Wait a minute. Fees? Friendly? Aren't fees bad? Not always.

Rewind with me to September 2003. That's when New York governor Eliot Spitzer, then Attorney General, first braced for a fight with fund operators Bank of America (NYSE: BAC  ) and Janus Capital (NYSE: JNS  ) , among others. Each was accused of playing favorites with big-money clients by allowing them to trade more frequently than regular investors.

But of course, it was more than that. By timing trades over short periods, big clients racked up millions in profits, and left funds and their retail investors to pay huge transaction fees. (For more on this, take a tour of the turnover ratio.)

Foolish colleague Bill Mann, who covered the scandal when it first broke, put it best, "If PetroChina (NYSE: PTR  ) announces a big dividend increase, its shares trading in China react. But it's still nighttime in the U.S., so timers have the ability to jump into funds on one day, wait for the price to react to the news, and then get out."

And retail investors? After learning the truth, the funds they had looked upon like Heidi Klum on the Sports Illustrated cover turned out to be Joan Rivers before the makeup.

How it works
Enter redemption fees, which, like an expense ratio, charge traders a percentage of assets. But that's where the similarities end. Motley Fool Green Light co-advisor Shannon Zimmerman, who leads our Champion Funds service, explains:

"Unlike loads or expense ratios, redemption fees are kicked back into the fund itself, returned to continuing, long-term shareholders as a way of, among other things, deterring market timers and defraying transaction costs," Shannon wrote in the May 2005 issue of Champion Funds.

Practically, this means that the net asset value of the fund, or NAV, will be largely unaffected by the trader who changes funds more frequently than Gisele Bundchen swaps outfits during a Victoria's Secret photo shoot.

Without redemption fees, the higher transaction costs could lower total fund assets, reducing the NAV and hurting investor returns.

Go under the hood
You'd think that would have the best fund managers in the business salivating to add redemption fees. Surprisingly, that's not the case. Many of Shannon's best picks, such as Bridgeway Small-Cap Value (FUND: BRSVX  ) , allow traders to have their way.

Your funds may be similarly lenient. To find out, check with Clicking the "Fees & Expenses" tab will show you everything investors are required to pay, including redemption charges.

Follow the money
When it comes to stocks, day trading is hazardous only to your portfolio. When it comes to funds, day trading is hazardous to everyone who has a stake. That's why, if you're a long-term investor, it's in your best interest to seek out funds that use redemption fees to discourage the give-me-a-triple-shot-of-espresso fund-slingers.

Interested in more moneymaking advice? Consider Green Light. Therein, Shannon and co-advisor Dayana Yochim show you how to unlock the hidden fortune inside your paycheck. There's $686 worth of tips in the January issue alone. Click here to get your copy and 30 days of free access to the service. There's no obligation to subscribe.

Interested in more mutual fund basics? Your digital chariot awaits:

Bank of America is an Income Investor recommendation.

Fool contributor Tim Beyers, ranked 996 out of more than 21,200 in Motley Fool CAPS, our investor intelligence database, writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. The Motley Fool's disclosure policy won't redeem your returns.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 535742, ~/Articles/ArticleHandler.aspx, 10/27/2016 9:29:55 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,199.33 30.06 0.00%
S&P 500 2,139.43 -3.73 0.00%
NASD 5,250.27 -33.13 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
BAC $16.87 Up +0.15 +0.00%
Bank of America CAPS Rating: ****
JNS $12.99 Down -0.38 +0.00%
Janus Capital Grou… CAPS Rating: *
PTR $71.06 Down -0.74 +0.00%
PetroChina CAPS Rating: ***