Let's say that an investor owns $100,000 of a mutual fund and he decides to sell. This order would be settled at the market's close.

Can the mutual fund refuse to execute the sell order, perhaps because it's more beneficial for them to continue to hold the assets?

  • Why would that be beneficial to the fund manager? The fund managing company does not earn its income from the performance of the fund, it get its income from the fund managing fees!
    – Daniel
    Apr 23 '20 at 15:27
  • It would depend on the mutual fund, financial institution, and fine print on your agreement. Is this hypothetical or did you have a specific instance in mind?
    – Aias
    Apr 23 '20 at 16:06
  • @Aias it is an hypothetical situation. I'm trying to compare ETFs and funds in terms of the difficulties of selling them when it's the moment to do so (with ETFs you need to be aware of bid ask spread and volume, I'm trying to find out if with funds you might have different (but equivalent) issues).
    – Martel
    Apr 23 '20 at 16:15
  • 2
    A mutual fund cannot arbitrarily refuse sell orders at a whim. However, they can have standardized restrictions on how much you can buy or sell or how frequently you can go in and out of the fund, etc. Apr 23 '20 at 18:11

Yes, a mutual fund can refuse to execute a sell order (more correctly called a redemption order) under certain circumstances. These circumstances must be described in the prospectus that the fund provided to you when you first tried to invest in the fund and which prospectus you acknowledged that you had read in order for the fund to accept your investment. Ditto for all later investments too.

So, what are typical reasons for such refusals? Well, some funds don't like frequent trading and so restrict redemptions for some period (e.g. 30 days) following investments. Or they might allow redemptions within the prohibited time window but charge an x% fee on such early redemptions. Other funds have rules regarding large redemptions (and I have no idea whether $100K is considered a large redemption or not) that say that large redemptions will require n days to process. Most mutual funds have a ready-cash account into which incoming investment money is deposited until it can be invested into securities and from which small redemptions are paid out immediately, but for large redemptions, the fund may need time to sell securities so that it has enough cash on hand to pay out to you, and so they allow themselves n days to process your redemption order. In some cases, they may do a partial redemption that very evening and process the rest in a few days.

  • Also, occasionally (at least in the UK), funds that have invested in illiquid assets can get hit by a large wave of redemptions and suspend them for significant periods (months/years). This has famously happened to one of Neil Woodford's funds recently. Apr 26 '20 at 0:58

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