A dilution levy is a charge that an open-ended investment fund may apply to an investor who buys or sells a large number of units. When money enters or leaves a fund, the manager has to buy or sell underlying assets, paying dealing spreads, commissions and taxes. If units are dealt at a price based on mid-market values, those costs fall on all investors, reducing, or diluting, the value of their holdings. The levy passes the cost to the investor who caused it. It is paid into the fund, not to the manager.
The levy is one of several anti-dilution tools, alongside swing pricing, which adjusts the single dealing price for everyone trading that day. It is usually applied only above a stated size or when net flows are large, and the policy is disclosed in the prospectus. It is separate from the net asset value calculation itself and affects subscription processing and redemption processing.