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Watch Out For Fund Redemption Fees

- Alan Lavine and Gail Liberman

Wonders never cease. The mutual fund powers that be in their infinite wisdom are instituting redemption fees on their funds. Typically, if you invest and cash out your fund within three months, you can expect to pay a 2 percent exit fee.

Why? The fees are designed to out keep market timers. Market timers rapidly move in and out of funds for quick profits. Not only are they skimming money out of the funds, but they increase a fund's expenses. Higher expenses eat into your fund's performance.

The exit fees should help keep out market timers. They also make it easier for fund managers to implement their investment strategies.

But one expert is not so sure redemption fees are so great.

Unfortunately, the money investors pay in exit fees is more than the cost of letting market-timers move in and out of a fund, according to Jonas Ferris, editor of Maxfunds.com.

"The irony of this course is that a scandal that was costing fund investors money will be partially solved by charging investors more money," says Ferris in a recent online report.

The mutual fund executives, Ferris says, are just greedy.

"Fund companies love redemption fees," he says. "Money generated by redemption fees is counted toward a fund's performance. Because redemption fees often exceed the actual negative costs to the fund from short-term investing, the fund's performance is juiced up by these fees. Performance numbers drive marketability of a fund. So anything that helps performance is, as Martha Stewart might say, "a good thing."

Why couldn't mutual funds stop rapid fire trades by monitoring them electronically? They certainly have the technology to do it.

So what should you do when it comes to investing in mutual funds?

Keep money to cover at least six months' worth of expenses in cash. That way you won't have to tap your newly purchased mutual fund for cash if you need it.

Invest in your mutual fund for the long term. Understand the fund's investment objectives, fees and your goals before you invest. You won't have to worry about redemption fees after three months. But if you invest in a well-run mutual fund, you can own it for a lifetime.

Avoid mutual funds with longer-term redemption fees. Maxfunds.com says the Vanguard Capital Opportunities Fund has a five-year redemption fee. The Vanguard Emerging Markets Fund has a low lifetime redemption fee. The Bernstein Emerging Markets Fund has a lifetime redemption fee. In total there are 26 funds with lifetime redemption fees. Avoid them like the plague.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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