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Redemption Fee

A redemption fee is another type of fee that some funds charge their shareholders when shareholders redeem their shares. Although a redemption fee is deducted from redemption proceeds just like a deferred sales load, it is not considered to be a sales load. Unlike a sales load, which is used to pay brokers, a redemption fee is typically used to defray fund costs associated with a shareholder’s redemption and is paid directly to the fund, not to a broker. The SEC limits redemption fees to 2%, and has adopted a rule addressing the imposition of redemption fees by mutual funds in Rule 22c-2 of the Investment Company Act of 1940.

The structure of a redemption fee is typically defined by two features:

  • The amount of the fee (expressed as a percentage of assets)
  • The length of time from the original investment in which the fee is in effect
For example, a redemption fee expressed as “1.00% / 30 days” means that a fee equal to 1% of assets will be imposed if shares are redeemed within 30 days after they were originally purchased.

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