The redemption of an investment may generate a capital gain or loss, both of which are recognized on fixed-income investments and mutual fund shares. Taxation of capital gains is reduced by capital losses recognized in the same year.
Mutual fund gains and losses are included in the same capital gain calculation. To compute the capital gain or loss on redemption, the investor needs to know the cost basis. Bonds can be purchased at a price other than the par or face amount of the bond. The redemption of fund shares to a mutual fund company must occur within seven days of receiving a request for redemption from the investor.
Because mutual funds are priced only once per day, investors who wish to redeem their money must place the order before the market's close, or the time set by the mutual fund. Money is redeemed at the fund's net asset value NAV for the day, which is calculated as the sum of the value of the assets of a fund less its liabilities. Once the sale goes through, clients typically receive their funds including any gains via check or direct deposit to their bank account. Some mutual funds may have redemption fees attached, in the place of a back-end load.
A back-end load is a sales charge—a percentage of the fund's value which declines over time. If the investor holds the fund shares for a longer amount of time, the back-end load charged when the shares are redeemed is smaller. Investments in mutual funds are designed for individuals who buy and hold fund shares for the long term, and selling fund shares after a short period of time results in higher costs to the investor.
The investor pays sales charges and annual fees for professional portfolio management and the fund's accounting and legal costs.