Question

Explain what is meant by the phrase “mutual funds are redeemed and not sold.” What is the disadvantage of this redemption?

Answer 1

Mutual Funds are always redeemed and they are not sold because when we are selling the stocks, we will be selling it to the normal public but in case of the mutual fund it is redeemed back so the mutual fund company which has issued the units. mutual fund will be buying the shares back from the investor at the prevailing market price so it is not sold in the market but it is rather sold back to the Mutual Fund.

Hence, it is always said that Mutual Funds units are always redeemed back to the mutual fund and they are not sold in the market.

Disadvantage of redemption is that there will be an exit cost which will be applicable and it will also lead to diminish the overall rate of return and these units are not exited at the complete fair value because they are always exited at the end of the previous day so they are also having a lack of liquidity and they are also having a poor trade execution in terms of redemption and investor are also having problems in reducing their Mutual Funds at the time of a crisis because they will have to sell at a lower price than the market price because investors cannot exit at the current market price and the price will have to be adjusted at the end of the day.