Connect with us

Exchange Fee

« Back to Glossary Index

What Is An Exchange Fee?

The price (including but not limited to any late fees) charged by a customer/client or recipient of goods and services to a third party in connection with an exchange transaction is referred to as the exchange fee.

Deeper Definition

When an investor transfers from one fund to another, an exchange fee is almost always levied. When switching currencies, the investor incurs additional costs in addition to the exchange fee.

Management companies charge exchange fees to investors who want to exchange or transfer shares from one mutual fund managed by the company to another. Exchange fees are distinct in that they are only charged when an inter-fund transaction is requested. Mutual fund exchanges are discussed in the prospectus of a mutual fund, along with the other fees associated with investing in the fund. Many mutual fund companies do not charge any fees for transferring shares.

A mutual fund’s prospectus contains information on fund exchanges. Frequently, an exchange privilege is free. However, if a capital gain occurs, the exchange of shares may result in taxation. Tax requirements are most common in fund-to-fund transfers but converting share classes within the same fund is typically regarded as a non-taxable event.

A mutual fund company could have an open exchange policy for its mutual funds. The fee is minimal, with specific provisions prohibiting frequent trading, which prevent an investor from purchasing or exchanging shares in the fund within the next 30 days. In its prospectus, the company’s Total Stock Market and Index Fund provide more information on its exchange policy. Investors in the Total Stock Market Index Fund could easily transfer their shares to more conservative bonds found for greater security.

Exchange Fee Example

If an individual is an investor in a certain mutual fund and discovered that another has a better asset mix and shows more growth in potential, he/she must consult the financial advisor before going ahead. If the exchange fee appears to be prohibitively high, the potential growth of both funds against the exchange fee and the level of economic viability that the investment guarantees should be put into consideration.

« Back to Glossary Index

Get the news right in your inbox