Mutual Fund Timing

Mutual Fund Timing

A legal but frowned-upon practice whereby traders attempt to profit from the short-term differences between the daily closing prices of a mutual fund.

Timing occurs when investors attempt to gain short-term profits from buying and selling mutual funds. This has a negative effect on the fund's long-term holders, as they will be subjugated to higher fees due to the short-term trading. In order to prevent this, many mutual funds will impose a short term trading penalty upon the sale of funds that are not held for a minimum period of time. This transfers the short-term costs of buying and selling new shares within the fund's portfolio to those investors not planning to stay with the fund for the long-term. Don't confuse market timing with mutual fund timing. Market timing is a practice of trying to predict the best time to buy and sell stocks for the purpose of a short-term gain. Mutual fund timing is an practice publicly frowned upon by many mutual fund companies in their prospectuses.

Notes:

In September of 2003, some mutual fund companies were investigated for permitting Hedge Funds to "time" mutual funds purchases. These hedge funds paid the mutual fund companies money for the right to buy and sell funds on a short-term basis without any short-term penalties.

See also: Arbitrage, Late Day Trading, Market Timing, Material News, Mutual Fund, NAV, Prospectus