How to Bypass the Mutual Fund Early Redemption Fee

One of the inconveniences with investing in mutual funds is the annoying early redemption fee. This fee imposes a 2% deduction to your account should you decide to withdraw your funds within 30 days of your last contribution.

Initially, this was the major reason why I have decided to move towards trading individual stocks. However, now that my view of mutual funds has changed, I have discovered a way to bypass this early redemption fee.

The problem I had before I realized this strategy was that I could not sell my funds when it was at a high price without being subjected to this fee. Of course, I could always hold my funds and expect long term growth but I am more fascinated with the buy low sell high idea.

S&P 500 Mutual Funds (US Index)

Before I go any further into my strategy, I just want to mention that the mutual fund I have in mind in writing all of this is the S&P 500 index. If you have been following along on Million Endeavour, you would probably know that lately I have been doing quite a lot of research on US Equities.

Anyhow, until recently, I have held 30% of my portfolio on the US Index Fund from TD Bank. This prevented me from selling my funds should the S&P 500 index reach a particularly high point. To remedy this situation, I have decided to sell 50% of my funds in the TD US Index and have used that money to purchase the US Index Fund from Royal Bank.

This maneuver will give me the option to work with two different US index funds. In another words, if the S&P 500 reaches a relatively high point, I am able to sell my funds from TD Bank because I have purchased the fund at an earlier point.

Once I sell my funds, I will begin to wait for the S&P 500 to drop again before I re-purchase the TD Index Fund. In the off chance that the S&P 500 Index recovers and reaches another high point within thirty days, I will sell my US Index Funds from Royal Bank instead of the funds from TD that I have just recently purchased.

If all of this is confusing, it is because sometimes, I am not very good at explaining things. This is why I have created this hypothetical timeline to convey my thoughts better.

  • April 18, 2014: Purchased $1500 from TD US Index Funds. (Withdrawal date without fee – May 18, 2014)
  • April 30, 2014: Purchased $1500 from RBC US Index Funds. (Withdrawal date without fee – May 30, 2014)
  • S&P 500 High Prices: May 30, 2014 and June 15, 2014
  • S&P 500 Low Prices: June 2, 2014 and June 20, 2014

According to this timeline, I would:

  • Sell my TD US Index Funds on May 30, 2014 and re-purchase on June 2, 2014
  • Sell my RBC US Index Funds on June 15, 2014 and re-purchase on June 20, 2014

Benefits to Multiple Index Funds

By having two different US index funds, I am able to sell my funds without subjecting to an early redemption fee. This will ensure that I reap the high tide and gain maximum profit.

In fact, I can probably use three different US index funds to maximize efficiency even more. This strategy will work because these funds perform and underperform at almost the exact same rate.

The alternative will be to hold your index funds without having to sell at a high point. The S&P 500 is performing in an upward trend and growth is almost certain in the long run with exception to when the market is in a recession (more on this later on).

Any discount brokerage will allow you to purchase mutual funds from another bank, even if it is not the bank you hold the account with. This strategy only applies to mutual funds with an early redemption fee and is currently just my hypothesis. For now, I will take the initiative to experiment and share the results when I have any.

In fact, there are US index funds that don’t fall under the mutual fund category and does not come with any redemption fee. Those funds will be on my list to check out next.

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