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Mutual Fund Withdrawal: How Quickly Can I Take My Money Out?

02/15/2019

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Investors frequently overlook mutual fund withdrawal statistics in favor of more attention-grabbing information such as historical performance, expense ratio, portfolio turnover or manager tenure. However, basic logistical characteristics can be the most important aspects of any investment, especially for people dependent on their liquid assets to pay bills or fund lifestyle.
The time it takes to withdraw money from a mutual fund depends on the fund, the intended use, and the type of account in which shares are held. Investors also need to consider the ramifications of quick turnarounds with mutual fund investments and ensure that their use of these investment vehicles is aligned with their investment goals and financial plans.

How Do I Sell Shares?

Existing mutual fund shares are not sold on the market like stocks, bonds or ETFs would be. Instead, transactions are made with the fund itself, which will redeem shares for cash.

Mutual fund shares only trade once per day, and this occurs after the market for underlying securities has closed for the day, which is 4 PM Eastern for most capital markets in the US. At that point, the net asset value (NAV) of the fund and each share can be calculated based on the value of its portfolio holdings. Share redemptions pay out NAV to the investor, less any required transaction fees.

Unlike ETFs and stocks, mutual funds provide no intra-day liquidity, so the evening is the soonest a request made during the day can be fulfilled.

How Can I Request a Mutual Fund Withdrawal?

The process of redemption depends on the nature in which shares were purchased, but investors can typically start by contacting the professional or institution with which the shares were purchased. Orders can be placed through an advisor, a broker or through the fund company itself.

Investors should identify their account number and the type of account (e.g. 40k(k), IRA, non-qualified) and use this information to communicate their wishes to a professional through an online transaction platform. Investors can choose to redeem all or a fraction of shares, which can be expressed in dollar amounts, share count or percentage of total holdings.

Redeeming shareholders may also need to indicate the desired destination of funds and method of payment, which could be in the form of wire transfers, deposits into linked accounts or physical checks in the mail.

The improvement and ubiquitous nature of online platforms have made the request portion of cash-outs a smooth and almost instantaneous process. This has very little impact on the time required to liquidate fund holdings, when it may have been a stumbling block in the past.

Mutual Fund Withdrawal Settlement Times

Investors are typically able to place and execute redemptions on the same day, assuming the order is placed before the daily deadline. However, funds are not transferred prior to settlement, so real, functional liquidity is dependent upon settlement times.

Settlement periods provide mutual funds with opportunities to convert securities into cash, if necessary, though most have cash inflows or liquid assets on hand to satisfy normal redemption volumes.

Mutual funds are legally bound to repay mutual fund withdrawal within seven days, though most funds usually settle in one to two days following a request. Additional guidelines were adopted in 2016 to help ensure that money market fund portfolios continued to be aligned with investor’s best interests in an evolving investment industry.

Most mutual funds settle transactions on the day following a request or one day after that. For comparison, stocks and ETF transactions generally take two to three days to settle, while money market funds settle on the same day, because they are meant to be liquid sources of capital to convert quickly.

Issues You May Encounter in Mutual Fund Withdrawals

Investors must also consider the type of account in which a mutual fund is held because they are treated very differently. A regular brokerage account or an account opened directly with the mutual fund with no special tax treatment offers no additional roadblocks to liquidity, but qualified money in a retirement account creates some issues.

In a qualified retirement account such as a 401(k), a 403(b) or traditional IRA, income tax liability is deferred until withdrawals are made, at which point distributions are taxed as ordinary income. If someone sells a mutual fund that is held in a retirement account before they are 59 and ½ years old, they generally cannot access those funds without incurring a 10% penalty on top of taxes owed. Non-qualified withdrawals from funds held in Roth accounts waive the tax-free treatment applied to appreciation within those accounts.

There are obviously some circumstances where these accounts could be the only viable sources of capital for investors whose circumstances took unexpected turns, but sound financial plans should seek to avoid these situations at all costs.

Think Before You Trade

It should go without saying, but the availability of trading does not necessarily make it a good idea to transact. Many mutual fund companies do not allow shares to be redeemed within 30 days of initial purchase, because this is deemed excessive trading.

Mutual funds are generally not intended to be deployed as short-term vehicles, and these rules are set in place to protect consumers from exposure to erosive impacts of transaction fees and commissions. Some fund companies even place penalties on roundtrip trades that can exceed 200 basis points, and multiple instances of such trading can result in blocks being placed on certain accounts to prevent additional purchases.

Investors also need to consider the tax ramifications of short-term mutual fund transactions. Capital losses cannot be harvested in mutual fund shares that are repurchased within 30 days of a sale, as these are deemed wash sales. Roundtrip trades waive first-in-first-out accounting availability, which can be important for cost basis optimization.

DISCLOSURES

Linden Thomas and Company and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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