The mutual fund fee that may be good for you

Published on NewsOK Modified: January 23, 2014 at 3:56 pm •  Published: January 23, 2014
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NEW YORK (AP) — Not every fee is bad.

Now that many investors are returning to stock mutual funds for the first time in years, they're focused on minimizing their expenses. It's one of the easiest - and most powerful - steps they can take. But one fee they might encounter shouldn't be a turnoff, researchers say. Instead, it's actually an encouraging sign.

It's the redemption fee that some mutual funds charge to investors who quickly jump in and out of a fund. Researchers have found that funds with redemption fees tend to do better than those that don't, largely because they discourage short-term traders -- and the additional costs that they may bring -- from entering.

The fee applies only during a preset time period: Investors who withdraw money within, say, two months of their initial investment get charged. The fee can be as much as 2 percent of the amount withdrawn, and the proceeds go to the fund and its remaining investors.

"We will never get rid of it," says Bill Mann, portfolio manager at Motley Fool's mutual funds, all of which have redemption fees. "It is a force for good." Among the funds Mann runs is the Motley Fool Great America fund (TMFGX), which has a five-star rating from Morningstar.

Redemption fees are limited in number. Morningstar says 13 percent of mutual funds have them. But where investors will see them most often is among stock mutual funds.

Roughly one in four of all foreign stock mutual funds has a redemption fee, according to Morningstar. Among funds that focus on a specific sector or industry, such as technology or utility stocks, 26 percent carry a redemption fee.

The Al Frank fund (VALUX), for example, is a large-cap value fund that charges a 2 percent fee on withdrawals made within 60 days. It wasn't always so, says John Buckingham, the fund's manager.

The fund didn't charge a redemption fee when it began in 1998. But after it posted a return of 60.4 percent in 1999, many investors noticed the big number and came calling. Some were more interested in making a quick buck than a long-term investment.

"If someone gives you $1 million and redeems it two days later, that wreaks havoc on your portfolio," Buckingham says. "Do I spend the money? Do I not spend the money? Do I sit in cash?"

It became even more difficult around 2003, when a newsletter recommended buying into the fund. Buckingham says he saw $50 million to $60 million come in over the span of a month.