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

Mutual fund redemptions can take longer than stock redemptions.

Mutual fund redemptions can take longer than stock redemptions.

A mutual fund is a pool of actively managed investments, such as the shares of multiple corporations. You don't own any of these shares individually. Instead, you own a small percentage of the total value of all the shares in the fund, a percentage represented by your units of the fund. You can redeem these from your broker or from the fund's management.

Redemption Through Your Broker

The redemption process begins with your contacting your broker, either with a phone call or by going online and accessing your account. With your online account, go to your account page and select the mutual fund you want to redeem. If you're selling all units of the fund, select "All." If not, indicate the number of units you want to sell. Note that because mutual funds are bought and sold only once daily at the close of trading, you will not indicate a sales price, as you might for a stock. Instead, the fund will sell at the NAV price -- the net asset value of the fund at the closing, which is 4 p.m. Eastern time. If you're phoning your broker with sales instructions, the process is similar.

Directing the Proceeds

You can ask your broker to return the sales proceeds to your account, or you can ask him to send you a check. If you're selling online, the money will return to your account automatically. Once the funds become available, you can transfer the funds to your bank account with an online bank transfer. If your account has a check-writing capability, it might be simpler just to write a check from your brokerage account for deposit to your bank account. Note that various fees may apply to the redemption. There's a sales transaction fee from your brokerage that normally runs from $6 to $30. If you haven't held the funds for the minimum time required by fund management, there is an early redemption fee that may run 1 percent to 2 percent of the proceeds. If you bought the funds through a broker, they may have what's called a 'back-end load," an additional sales fee charged when you sell the fund. The back-end load fee varies from fund to fund, and depends also on how long you've held the fund.

Time Constraints

Whether your broker is executing the sell order or you're doing it yourself online, note that it's the mutual fund's management, not your broker, that liquidates your units, and that it has seven calendar days to disburse the funds. With computerization, the process usually takes far less time, but seven days is the worst case.

Redemptions from Fund Management

In most cases, where a broker holds the mutual fund shares, it's simpler to redeem them through your broker. If you have physical possession of the shares, however, you can redeem them directly with mutual fund management. Often you return the shares or a redemption coupon to the fund, but the procedure varies with the fund. A phone call to the fund's help line or sales line generally clarifies any procedural or address issues and may speed up the process.


About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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