Mutual funds are baskets of investments that investors can buy, frequently used to gain the benefits of diversification. Many fund families allow their investors to buy and sell shares within the fund at little or no cost. Along with the ability to trade shares for free, though, can come limitations on how often investors can transfer their money in and out of shares in the same family.
Some funds limit how often investors can move money between mutual funds. Policies vary from company to company and from fund to fund. For instance, one company limits the number of times that an investor can buy shares in a fund and then sell shares in that same fund -- sometimes referred to as roundtrip transfers -- over a 30-day period. Another fund limits round trips within a 90-day period, and if investors exceed the limit, can ban them from making transfers for a period of time. As another example, the Thrift Savings Plan, which is the 401(k)-equivalent plan that the federal government offers its employees, won't let participants make more than two transfers per month into anything other than the plan's Government Securities Investment fund.
Transferring to Other Companies
While mutual funds are liquid, they aren't exactly like shares on the stock exchange. If a mutual fund provider doesn't have an agreement with a given broker, investors in the fund may not be able to transfer their shares from the fund company to the brokerage company. In that instance, the only way to transfer those shares into a brokerage account would be to sell the shares, then to transfer the cash into the other account.
Tax on Transfers
If an investor takes a share and moves it from one taxable account to another without selling, that transfer might not be a taxable event, since no money changes hands -- but calling a share transfer a "transfer" doesn't necessarily eliminate tax liability on the transaction. Selling shares to transfer cash into another account or selling shares to buy shares in a different mutual fund is likely to trigger capital gains liability if the sale is profitable and conducted through a taxable account.
The ETF Alternative
Technically not mutual funds, exchange-traded funds are baskets of investments that trade on the stock market like other shares of stock. While an ETF owner might be subject to a given market's rules for buying and selling shares, or to limitations such as the Internal Revenue Service's "wash sale" rule, there are no rules that prevent investors from transferring ETF shares specifically. One of their advantages is that they can be traded, in the words of ETF company AdvisorShares, "any second of the trading day," but ETF investors will probably have to pay brokerage commissions when they buy and sell ETF shares.
- Securities and Exchange Commission: Mutual Funds -- A Guide for Investors
- Fidelity: Fidelity's Excessive Trading Policy
- T. Rowe Price: Davis Selected Advisers Excessive Trading Policy - Participant Notice
- Thrift Savings Plan: Interfund Transfers (IFTs)
- Scottrade: Mutual Fund Transfers
- Citi: Mutual Fund Share Transfer Restrictions
- American Century Investments: Seven Key Tax Tips for Mutual Fund Investors
- NASDAQ: What Are ETFs?
- AdvisorShares: What is an ETF?
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