Reviewed by Aug 27, 2020| Updated on
The redemption fee is the charges levied on an investor when he or she decides to redeem the investment by selling the fund units held. This fee is also referred to as the exit load or exit fee.
The other names of the redemption fee are short-term trading fee and market timing fee. The redemption fee is levied when the investors decide to redeem their investments within a specific timeframe.
This is done to prevent investors from redeeming their funds in a short time. The redemption fee, in a way, encourages investors to stay invested for a long time.
Understanding the Redemption Fee
Fund houses charge the redemption fee when an investor decides to redeem his or her units within a specified timeframe. Hence, investors should ensure that they seek clarification about the redemption fee at the time of investment itself.
Not factoring the redemption fee may result in investors not realising the amount they ought to pay at the time of redemption, making the final payout insufficient to meet their goals.
Mutual funds should be considered as a long-term investment option. It is, for this reason, the regulators allow the fund houses to impose the redemption fee on investors.
Why is the Redemption Fee Levied?
Most fund houses have their redemption fee levied when the investors decide to redeem their investments within thirty days from the date of investment.
This, in a way, discourages investors from redeeming their investments within a short period. Investors should note that the redemption fee or the exit load is not a part of the expense ratio. Fund houses charge a fee called the expense ratio to manage the investments of investors.
When an investor exits the fund scheme in a short time, he pays the redemption fee that helps the mutual fund companies mitigate transactional costs.