Mutual Fund Ball and Chain

 

The broker told me not to sell because the mutual fund I owned had a 2% redemption fee and they would penalize me if I did.

I got to thinking about it and did some simple math to see what that would cost me if I sold. Several months ago I bought $5,000 of the fund. Fortunately, it was a no-load so I was not charged any commission. It seems that the brokerage house has instituted this fee for the sole purpose of dissuading me from ever selling it.

Now I could sell it for $5,500 and make a nice $500 profit in the last 3 months. Their charge of 2% would be $110. In other words they were charging me 22% of my profit which you can easily figure as $110/$500. That's a long way from 2%. What a rip. My net was now $390.

More and more brokerage companies and mutual funds are adding redemption fees. No-load mutual funds are adding the fees even when you have an account with the fund family. Why? The fund managers are paid their 6-figure salaries not on how much profit they make for you but on the amount of money they have under management. He can generate big money for himself while you lose.

The whole idea of the mutual fund was to have a professional manager make money for you yet last year more than 95% of stock mutual funds lost money. It is pretty obvious you don't need this guy to mangle your cash.

In the future before you purchase any fund ask the broker of there is any kind of redemption fee. If there is then find another fund and/or another broker. Discount brokers are the best because their brokers are not allowed to give you advice. You will find that advice from a broker is a eulogy for your money.

Redemption fees are like a ball and chain on your ability to make money. Any professional trader (and I was a floor trader for 17 years) will tell you that a small loss is OK, but never allow yourself to have a large loss. Excess fees are put on by brokerage companies and funds to keep you from selling out of a losing position. The broker does not make any money if your cash sits in a money market account so he will do everything legally possible to keep you from selling.

Buy and Hold might be OK for long-term bull markets, but during the current long-term bear market you should be able to sell without adding injury to insult. Redemption fees are a method to intimidate the investor from selling out a losing position. Don't buy anything that comes with a ball and chain.

Copyright 2005

 



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