An exchange privilege is the option to switch money between one or more different mutual funds with an investing agency. The purpose of the privilege is to allow no-cost exchanges between mutual funds so an investor can safeguard funds or take advantage of different market conditions. In most cases, an exchange privilege does not typically cost an investor anything; moving money between mutual funds is an added benefit offered through financial institutions. Mutual funds take large numbers of different stock and place them in a group, allowing for safety through planned diversification. Different mutual funds in the same family will most likely be aggressive, growth, principle-saving, or low-risk options.
Mutual funds can benefit investors at different times in a given market or during certain market conditions. Classic mutual fund investing teaches that younger investors can place funds into the most aggressive funds in a mutual fund family. This allows younger investors to take advantage of long-term investing, which tends to smooth out the significant ups and downs in a financial market. Middle-age or older investors, however, may desire mutual funds that are less aggressive and carry less risk. This allows older investors to grow their money slowly without risking the important capital that may be used sooner when the investor retires at a certain age.
The above scenarios outline the basic need for an exchange privilege. As investors age and market conditions change, moving capital between different mutual funds will most likely occur. A financial institution may offer an exchange privilege to investors, so moving capital to different funds will not erode the hard-earned capital of investors. In most cases, mutual fund investing changes must occur in the same family of funds. This means that a mutual fund family, which invests mostly in domestic companies, may not include international investing options.
When investors place capital into mutual funds, it may be a good idea to place different amounts into different mutual fund families. This allows the investor move capital through each of these funds at different times with the use of an exchange privilege. For example, an investor may choose two different mutual fund families: international companies and domestic growth companies. If the international mutual fund family is experiencing heavy amounts of risk, the investor can then move capital in this family to less-risky mutual funds. Moving capital from the international mutual fund family to the domestic growth company is not possible with an exchange privilege,