Final answer:
A redemption fee or sales charge can refer to a front-end load (fee charged when you buy the fund) or a back-end sales charge (fee charged when you sell the fund). These fees are designed to discourage short-term trading and to cover transaction costs within the fund. The other options relate to different fees such as the annual expense ratio and exchange fees.
Step-by-step explanation:
A redemption fee or sales charge is a cost that a mutual fund investor might encounter in relation to their investments. A redemption fee is specifically a fee charged by a fund when shares are sold. This fee is generally used to discourage short-term trading and to ensure that other investors in the fund do not bear the costs associated with frequent trades. A sales charge, on the other hand, can occur when buying or selling a fund and typically falls into one of two categories:
- A front-end sales charge (‘load’) is applied when you purchase shares of a fund and is effectively a fee charged when you buy the fund.
- A back-end sales charge (or ‘deferred sales load’) is a fee charged when you sell the fund, often decreasing over the period the investor holds the shares.
It is important to note that option 3, a fee charged annually for holding the fund, refers to an expense ratio and not a sales charge or redemption fee. Likewise, option 4, a fee for switching between funds, is often referred to as an ‘exchange fee.’ Therefore, the correct response to the question would be both 1) and 2), as these are the definitions of a sales charge in the context of mutual fund transactions.