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

Investors buy mutual funds in two different ways: directly from the fund or through an intermediary. The manner in which you bought the shares determines the way you must sell the shares. If you bought funds directly, you can place a sell order over the phone or on the mutual fund company's website. If you bought mutual funds through a broker or a 401(k) custodian, you must communicate your sell order through them.

Types

• There are many types of mutual funds that cater to different kinds of investors. Stock-oriented funds appeal to people with a long investment time horizon because historically stocks outperform other investment vehicles when held for more than a decade. Bond funds provide monthly interest payments that supplement the income of retirees and other investors. Money-market mutual funds provide a conservative place to put short-term funds. The funds contain short-term certificates of deposit, commercial paper and government bonds that provide some interest but little or no price fluctuation.

Effects

• Mutual fund shareholders pay load fees or commissions when they trade funds. A-class shares assess an up-front fee of 4 percent or more, but shareholders pay nothing when they sell the fund. B-class shares cost nothing up front but have a decreasing back-end fee. If shareholders sell the fund within a year they incur a fee of 4 or 5 percent. The fee decreases every year and ceases to exist after seven years of share ownership. C-class shares cost nothing up-front but have a 1 percent back end fee if sold within 12 months of purchase.

Time Frame

• Mutual fund trades occur on the same business day that orders are placed if received by the trading desk before 4 p.m. Eastern Standard Time. If you place a trade after 4 p.m. on Friday it will not process until Monday. All mutual fund trades occur after the New York Stock Exchange closes for the day because the closing values of the underlying securities are necessary to price the mutual fund shares. The Securities and Exchange Commission requires brokers to transmit fund sales promptly to shareholders but does not impose an actual processing time frame.

Considerations

• Some investors sell shares that have lost value in order to write off losses on their taxes. If you sell a fund at a loss and buy shares in the same fund within a time frame beginning 30 days before the sale and extending 30 days after the sale, the Internal Revenue Service regards the transactions as a "wash" and does not accept it for tax write-off purposes. The "wash" rule also applies if you sell shares in a fund and reinvest in a similar but not identical fund.

Warning

• If you own a mutual fund within a 401(k) or Individual Retirement Account, you could face tax consequences if you sell your shares. People under the age of 59 1/2 must pay a 10 percent penalty for accessing funds from retirement accounts. If you reinvest the funds within 60 days in another retirement account such as a certificate of deposit IRA, you can claim back withheld taxes at the end of the fiscal year.