Keep an Eye on Fund Redemption Rates

This is another of these activities in the financial industry that scoots beneath the radar screen of all investors but could possibly be hindering returns in your mutual funds.

Redemption costs are an offshoot of the market-timing scandal that hit the fund industry in 2003. Market timers-individual traders--use the fund to quickly trade securities based on rapidly changing market conditions, especially discrepancies between your US and international markets. Generally market timing is legal, and sometimes it could raise the net asset value of a fund.

Our goal is usually to be in equity funds throughout a market rally and out when stocks turns south. However in nearly every case we'll stick to funds for weeks or months until a trend dissolves.

However, the short-term trading (a couple of days) done by some fund owners results in higher and higher redemption rates. When traders cash out their gains from market timing, fund managers must sell other securities to improve the money. That always results in climbing brokerage and tax bills for some other clients. Also, when traders jump in and out of a fund, the manager does not have an opportunity to put their cash to work with the advantage of all fund holders.

So this is a good idea to understand your funds' redemption rates. The very best funds have single-digit or low double-digit rates. Some funds, however, have costly triple-digit rates. Most analysts think an excellent fund must have a redemption rate below 40%.

Already, the is wanting to head off the issue. For most funds you can find fees of 1-2% on withdrawals made within 90 days of investing. Sometimes the fee is imposed for twelve months.

Naturally, nearly all timing occurs in aggressive funds containing volatile stocks which are at the mercy of large price swings. International funds may also be targets of market timers.

You will get out the redemption rates of one's funds by checking the annual and semiannual reports at company's site or at the Securities and Exchange Commission site. Which will take more digging that a lot of investors care to accomplish, we think. Inside our opinion, it's easier to call the fund and make an inquiry.

Once you obtain an obvious picture of one's funds' redemption rates, you may make the best decision on if the gains in the fund make possible higher costs acceptable.