Exit Fee
What Is an Exit Fee?
An exit fee might be charged to investors when they recover (sell) shares of an investment fund. Exit fees are most common in open-end mutual funds. An open-end fund is an investment vehicle that utilizations pooled assets, which takes into account continuous new contributions and withdrawals from investors of the pool.
When exiting such a fund, an investor might need to pay a redemption fee alongside any back-end sales loads associated with their share class.
Understanding Exit Fees
Exit fees can be associated with a conditional sales charge or a redemption expense. Exit fees for mutual funds are determined by the fund company. A few funds will be structured with back-end sales loads giving commission fees to the intermediary broker.
Fund companies likewise structure share classes to require a redemption fee, which is a charge that is credited to the share classes' expenses.
Back-End Sales Loads
Back-end sales loads are paid to intermediaries and structured as part of a share class' sales commission schedule. These charges can be a static percentage fee or they might be unexpectedly deferred. Static back-end sales loads are in effect for the duration of a holding and charged as a percent of assets executed. Static back-end sales loads are ordinarily lower than front-end fees, averaging around 1%
Contingent deferred back-end fees decline over the life of the investment. They might even terminate after a predetermined time span, in which case a share class could be eligible for reclassification.
Redemption Fees
Redemption fees vary from back-end sales loads since they are associated with the fund's annual operating expenses. Mutual fund companies incorporate redemption fees into their fee schedules to moderate the short-term trading of mutual fund shares.
Redemption fees are normally just in effect for a predetermined time frame period, which can go from 90 days to roughly one year. Assuming that an investor decides to reclaim shares during the predefined time span, the fee assists with offsetting the value-based expenses associated with the redemption and furthermore assists with shielding different investors from higher per share expenses overall.
Disclosure of Exit Fees
Back-end sales loads and redemption fees are commonly communicated and charged as a percentage of assets. An open-end mutual fund is required to uncover its sales load schedule as well as its operating fee schedule and any redemption fees in its prospectus.
Exit fees can likewise be charged by different types of funds, including hedge funds, annuities, and limited partnership units. These funds will give fee disclosures in different forms. Subsequently, investors should comprehend the fees associated with investing in and recovering their investments.
Features
- These fees are most frequently found among open-end mutual funds.
- Investors might need to pay both a redemption fee as well as back-end sales loads associated with their share class.
- An exit fee is paid by an investor when they sell the shares of a mutual fund that they own.
- The mutual fund company settles on the exit fee and structures share classes to order a redemption fee — a charge credited to that share classes' costs.
