What is an Exit Fee?

An exit fee is a cost that investors incur at the time redeeming shares from a specific fund, usually open-ended mutual funds. At the time of exiting a mutual fund, an investor pays an exit fee followed by back-end sales load related to the class of shares.

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How Does an Exit Fee Work?

Exit fees can be observed as a transactional sales cost or a redemption cost. A mutual fund company decides the exit fees for mutual funds. There are some funds that involve back-end sales loads so as offer commission fees to the intermediary or agent. These companies also set a redemption expense that is funded to the expenses of share classes.

Back-end sales loads

Intermediaries or brokers receive back-end sales loads that are an element of the commission of a share class. Such costs can either be consistent or dynamic in nature. Static back-end loads or the ones consistent in nature are set as a proportion of assets involved. Such loads are usually charged at a lesser price as compared to front-end fees. Contingent or dynamic deferred back-end fees are said to reduce as the maturity of investment comes close. A share class is fit for reclassification when the contingent deferred-back end fees expire post a given timeline.

Redemption Fees

Redemption fees are different from back-end sales loads as they are connected with operating expenses of funds on an annual basis. Mutual fund organizations combine redemption fees in their basic fees plan to reduce trading of mutual fund securities in the short-run. Redemptions fees usually exist for a given timeline ranging from 3 months to 1 year. In case, an investor wants to redeem securities in the given time period, this fee enables to reduce the operational costs related to the redemption of shares. Also, it safeguards investors interests by reducing costs per shares on an overall basis.

Disclosure

Back-end sales load and redemption fees are set on the basis of a proportion of assets. Open-end mutual funds need to exhibit their sales load and operating costs schedule and the associated redemption costs in its prospectus. Several other funds like annuities, hedge funds, and limited partnership units also charge exit fees. They offer fee-related information in different ways. Hence, it is crucial for investors to apprehend the extent of fees associated with the investment and redemption of shares.