Some Mutual Funds have Short-Term Redemption Fees

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We bought $5000 worth of the Dreyfus Index Fund (DGAGX) back in the middle of May via our Charles Schwab investment account. The gains for this particular fund which is exclusively invested in the Dow 30 have been OK. The quarterly dividends produced a nice return for us and we are content with the investment so far.

I want to point out something that any mutual fund investor should be very aware of. If you read the below screen shot detailing Fund Fees and Expenses, you will note the phrase “Short-term Redemption Fee”. The Yes that you see next to the phrase indicates that DGAGX has a 90 day Short-term redemption fee. What does it mean to have a redemption fee? In this particular case, if you attempt to sell any of the shares prior to holding the fund for at least 90 days, you will be charged $49.95.

Since we bought DGAGX in the middle of May that means we have to wait til the middle of August to avoid being charged a short-term redemption fee.(a wait period of 3 months) I did not know that when we initially purchased this particular Dreyfus fund. They were up front about it as you can see from the fund strategy screen shot, I just wasn’t paying attention. We are buying a brand new home in mid September and hope the fund grows so we can use it to help out on our down payment. We are making sure our down payment is well over 20% to avoid the dreaded PMI(Private Mortgage Insurance) which jacks up your monthly mortgage payment.

What is PMI? PMI protects lenders against borrowers who might be getting in over their head. The theory goes that if a borrower can not afford a substantial down payment, then their risk of defaulting on the loan is much higher. Makes sense and you can avoid paying PMI by putting 20 per cent down or more. Having PMI allows a stretched out home purchaser to finance more home than they can afford! Be Careful!

Finally do not confuse transaction fee with redemption fee. A transaction fee is something you pay when you buy or sell a fund. A redemption fee is based on a period of time in which you will be penalized if you sell the fund. If you sell after the time period is up, then you will incur no charges!

Make Sure You are Aware of possible Short-Term Redemption Fees on Certain Mutual Funds
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3 comments on “Some Mutual Funds have Short-Term Redemption FeesAdd yours →

  1. Here is, perhaps, a better description of what PMI is from democraticunderground.com :

    PMI is required on purchase loans (not home equity) where the loan is over 80% of the value of the house, because those are the riskiest loans, and because the lender will sometimes not get enough back in a foreclosure to cover more than 80%. The PMI covers only the difference between what you owed on the mortgage, and what the foreclosed house sold for. So, you have an 80,000 mortgage, the house sells for 78,000, the lender can get the other 2,000 back from the insurance fund. The idea is not only to protect lenders, but also to encourage lenders to make more loans to low income families or first-time mortgage holders with low or weak credit ratings. The lender is risking less by doing so.

    However, PMI doesn’t apply when the loan is 80% or less of the value of the home, or to second lien mortgages (like home equity loans). Also, with property values falling, a loan that was once only 80% of the value may wind up higher than the value of the house. So for most mortgage loans, PMI doesn’t help.

    As for you, I hope you realize, you can get the PMI dropped once your loan debt falls below 80% of the market value. That can come from you paying down your loan to 80% of the value, or from your house appreciating in value… Something which will one day begin to happen again. So keep an eye on property values in your area, for when they start to rise. Also, a PMI loan will have less favorable terms than a regular loan, so when you get to 80%, think about refinancing, and you might get a better rate. You’ll have to calculate whether you’ll be in the house long enough for the lower interest rate and lack of PMI will cover the finance costs on a new loan. There are a ton of calculators online for that. Try Bankrate.com, for instance.

  2. Frequently asked is “Is it worth paying a short term redemption fee for a mutual fund? ”
    In our case, the fee was 75 dollars when we tried to sell THOPX Thompson Bond Fund one month after we bought it. The length of time we had to hold the bond fund to avoid the short term redemption fee was 90 days. REMEMBER you only have to pay the short-term redemption fee if you try to sell the fund less than 90 days after you bought it.

  3. Does anybody out there have a position in the Mutual Fund PONDX
    PIMCO INCM C ? It had a 5 star morning star rating when we got in, but has lost quite a bit. We bought $9000 and it is down to around $8600 after a couple of months.

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