What is the Redemption Fee in Mutual Fund?

A redemption fee is defined as the charge imposed on investors when they sell shares of a mutual fund before the elapse of the designated time period. Also known as an exit fee, this fee is imposed to discourage short-term trading.  
 

Understanding the Redemption Fee 

A redemption fee is a penalty charged by mutual funds to investors who sell their shares within a short time frame, typically ranging from 30 to 365 days. This fee is intended to promote long-term investment and reduce the impact of frequent trading on the fund's performance.  

When collected, the redemption fee is reinvested into the fund, benefiting remaining shareholders. The fee is calculated based on the number of shares sold and can vary depending on the holding period. For example, a fund may charge a 1% fee if shares are sold within 90 days but waive the fee if held longer. 
 

Why is the Redemption Fee Levied? 

Redemption processing fees are imposed for several reasons: 

• Discourages frequent buying and selling, which can lead to increased volatility and instability within the fund. 
• Helps fund managers maintain their focus on the fund's long-term investment goals rather than short-term market movements. 
• Reduces the impact of transaction costs and potential market timing on long-term shareholders. 
• Helps manage the fund's liquidity and reduce the need for frequent adjustments to the portfolio. 
• Ensures that the costs associated with short-term trading are borne by those engaging in it rather than all shareholders. 
• Potential to reduce the administrative costs associated with processing frequent trades, with an aim to benefit all shareholders. 
• Helps maintain the overall performance of the fund by mitigating the effects of sudden large withdrawals. 
   

How to Calculate Redemption Fee 

Here is an example of how redemption fees can be calculated. 

Consider an investor who sells shares within 90 days and is charged a 1% redemption fee. 

Initial Investment	₹50,000
NAV at Purchase	₹100 per share
Shares Purchased	500 shares
NAV at Sale	₹104 per share
Sale Price After 60 Days	₹52,000
Redemption Fee (1%)	1%
Redemption fee	1% of (104*500) = ₹520
Net Sale Proceeds	₹51,480

In this example, the investor purchases 500 shares at an NAV of ₹100 each, investing ₹50,000. After 60 days, the NAV increases to ₹104 per share, making the shares worth ₹52,000. When selling these shares, a 1% redemption fee is applied, resulting in a fee of ₹520. Consequently, the investor receives net sale proceeds of ₹51,480.  

Disclaimer: for illustration purposes only