How to Cash Out a Mutual Fund and What to Expect

A mutual fund pools money from many investors to invest in a diversified portfolio of securities, such as stocks, bonds, or other assets. When you invest in a mutual fund, you purchase shares of that fund, representing a proportional stake in its underlying investments. Investors may decide to cash out their mutual fund investments for various reasons, including rebalancing their portfolio or needing access to funds. This article guides you through the process of liquidating your mutual fund shares.

Understanding Your Mutual Fund Holdings

Before initiating any redemption, it is important to understand the specifics of your mutual fund holdings. Mutual funds primarily come in two structures: open-end funds and closed-end funds. Open-end funds continuously issue new shares and redeem existing shares directly with the fund company at their net asset value (NAV), which is calculated at the end of each trading day. Conversely, closed-end funds issue a fixed number of shares that trade on stock exchanges throughout the day, similar to individual stocks, meaning their price fluctuates based on market supply and demand.

Your mutual fund shares may also belong to different share classes, such as Class A, Class B, or Class C, each with distinct fee structures. Class A shares typically involve an upfront sales charge, known as a front-end load, deducted from your initial investment. Class B shares often feature a contingent deferred sales charge (CDSC), or back-end load, which is a fee incurred if shares are sold within a specified period, often declining over time. Class C shares generally have no front-end load but may include a smaller CDSC for a shorter period and often carry higher annual operating expenses.

Identifying any applicable fees is an important preparatory step. These can include redemption fees, which are charges levied by the fund company when shares are sold, often within a short holding period to discourage frequent trading. Additionally, short-term trading fees might apply if you sell shares held for less than a certain duration, typically 30, 60, or 90 days. The fund’s prospectus, a document detailing its objectives, risks, and expenses, is the primary source for information on these charges.

Accessing your account information is also necessary before proceeding. You can typically find your mutual fund account details through the fund company’s online portal, recent account statements, or by contacting their customer service department. You will need to locate your specific account number, the full name of the mutual fund, and your current share balance. Understanding your cost basis is also a useful preparatory step as it will impact future tax calculations.

Initiating the Redemption Process

The most common method for selling mutual fund shares is through the fund company’s online portal. This typically involves logging into your account, navigating to the “Trade” or “Redeem” section, selecting the specific fund you wish to sell, and then specifying whether you want to sell a certain number of shares or a specific dollar amount.

Another common method is to contact the fund company directly by phone. When calling customer service, be prepared to verify your identity, often requiring your account number and personal information for security purposes. The representative will then guide you through the steps to place your sell order, confirming the fund name, the quantity of shares or dollar amount to be redeemed, and the destination for the proceeds.

Redemption requests may also be submitted via mail using a physical form. This typically involves downloading or requesting a redemption form from the fund company’s website or customer service. You will need to complete the form with all required details, including your signature, and may need to obtain a signature guarantee from a financial institution. A signature guarantee verifies your identity and ensures the authenticity of your signature, protecting against fraudulent transactions.

Mutual fund redemption orders are typically processed based on the fund’s net asset value (NAV) calculated at the end of the trading day. If you place a sell order before the market close (usually 4:00 PM ET), your shares will be redeemed at that day’s closing NAV. Orders placed after this cut-off time will generally be processed at the next business day’s closing NAV. The sale is typically executed on the day the order is received, assuming it’s before the cut-off.

Receiving Your Funds and Tax Implications

After your redemption request has been processed, you will receive your funds. Mutual fund companies typically offer several methods for disbursing the proceeds from a sale. The most common method is an electronic transfer directly to a linked bank account via the Automated Clearing House (ACH) network. This is often the fastest way to receive funds, taking two to three business days for the money to settle and become available in your bank account after the trade date.

Alternatively, you may have the option to receive a check mailed to your address of record. This method typically takes longer for the funds to arrive compared to electronic transfers, often requiring several additional business days for mailing and processing. Once the sale is complete and funds are disbursed, you will generally receive a confirmation statement detailing the transaction, including the number of shares sold, the price per share, and the total proceeds.

Cashing out a mutual fund often results in either a capital gain or a capital loss, which carries tax implications. A capital gain occurs when you sell shares for more than your cost basis, while a capital loss results from selling shares for less than your cost basis. For tax purposes, these gains or losses are categorized as either short-term, for assets held one year or less, or long-term, for assets held more than one year. Short-term gains are taxed at ordinary income rates, while long-term gains generally qualify for lower, preferential tax rates.

For tax reporting purposes, you will receive specific forms from the mutual fund company or your brokerage firm. Form 1099-B reports the gross proceeds from the sale of your mutual fund shares, along with the date of sale and, in many cases, your cost basis. This form is essential for accurately calculating your capital gains or losses on your tax return. You may also receive Form 1099-DIV, which reports any dividends or capital gain distributions you received from the fund during the year you owned it, separate from the proceeds of your sale.

A consideration for investors selling at a loss is the wash sale rule. This rule prevents investors from claiming a tax loss on the sale of a security if they purchase a substantially identical security within 30 days before or after the sale date. The wash sale rule can apply to mutual funds if you sell shares at a loss and repurchase shares of the same fund or a substantially identical fund within the 61-day window.