An estate plan helps protect your loved ones from unnecessary hassle and expense.
What is an exchange fee?
Mutual funds typically charge an exchange fee or a transaction fee when shareholders shift money from one fund to another within the same family of funds. This is only one of the several fees typically charged by mutual funds, all of which are summarized by each fund’s expense ratio.
An exchange fee is almost always applied when an investor transfers from one fund to another. The exchange fee is not the only expense the investor incurs when making a switch.
Exchange fees may be charged for a variety of investment transactions. Currency conversion, for instance, can carry an exchange fee known as a foreign transaction fee. This is a charge for converting U.S. dollars to yen, for example.
When calculating the value of investments, it is important to take into account the impact of fees upon total returns. Switching investments and paying exchange fees will eat into returns.
The Securities and Exchange Commission (SEC) doesn’t limit mutual fund exchange fees, so a financial institution can charge high fees for funds that won’t return a proportional yield.
Do you understand the costs associated with your mutual fund? Check out our mutual fund fees calculator and see if you’re paying too much.
Exchange fee example
An investor who is part of Mutual Fund A decides that Mutual Fund B has a better mix of assets and shows more promise of growth. Before making the leap, the investor consults her financial adviser. If the exchange fee seems prohibitively high, the investor must weigh the growth potential of both funds against the exchange fee before making her decision.
Sometimes a high exchange fee indicates a hot fund that many people want to be part of, and an investor just needs to pay it in order to get in. Other times, the high fee isn’t worth it, as it can hurt overall returns.