What's stopping me "day-trade" mutual funds?

Many (all?) mutual funds have a minimum holding period. You are generally not allowed to sell 30 days after a purchase.

It is not a hard rule in that if you do it once, you can get away with it. If you do it more than once there may be additional fees or I suppose you could be barred from future purchases.

Mutual funds are designed to be long-term investments and if the redemption of shares requires liquidation of assets, it can trigger a capital gains distribution for shareholders. Frequent trading also increases fund expenses. Because of this, mutual funds discourage short term trading. This can be via early redemption fees and/or minimum holding requirements. By any chance were your referring to ETFs rather than traditional mutual funds?

The main risk with your trading idea is that after you sell your position, the fund may continue to increase in price, never providing the opportunity for you to repurchase shares at a lower price.

On the surface there is very little downside. Most people prefer to do this short term trading with stocks or ETFs rather then mutual funds as transactions are immediate, where with mutual funds you trade at day's end. In fact many prefer options as the example 12% increase can be a multiple of that amount.

Profitable trades will produce capital gains on which taxes will be due, which is a downside.

The only thing left is can you predict the future? Since the beginning of mankind, some have claimed that ability and today is no different. Most do not have that ability (including myself) and it pays to be skeptical of those seeking to sell a system that gives one that ability.

So for those of us who cannot predict the future, a buy and hold strategy works great. In your example case what are you going to do with the $1,200 of found income? You should probably just invest it, so why bother taking it out? Allowing your returns to compound year over year is how some money invested turns into a much larger balance.

Also by using buy and hold you can concentrate on other ways to earn money thereby giving you even more money to invest.

Day trading mutual funds has its downsides, like the redemption time being only once per day at close of market, for one, and likely penalties for trading them too often.

However, ETFs (exchange traded funds) are a different story. In fact, many many day traders focus entirely on the SPY ETF, which is the most liquid security in the world by far.
2nd most heavily traded would be QQQ (nasdaq tech 100 index) followed by IWM (Russell 2000 index)

At the moment I’m heavily weighted in the QQQ ETF, and I may sell covered calls from time to time if I’m bearish or neutral.

The main “penalty” for trading these often in a non-IRA account is that you get hit with short term capital gains tax instead of long term capital gains tax.

If you are in the United States and you are talking about "open-end" investment companies, then there are two things that could stop this.

The first one is that some funds place contractual restrictions on how often you are allowed to trade, they may waive that or partially waive it if you move the money inside the fund family. They may also restrict how much you could sell at any one time. Most, if not all mutual funds can require you to accept a basket of securities in lieu of cash should you try and sell too much.

The second one is more pragmatic. Most mutual funds, though there are exceptions, only value their portfolios one time per day. It is usually one minute after the close of trading. So, imagine you decide to sell at 4:00 pm EST 100 shares of ABC Fund. The order will not be processed until the next valuation time which would be tomorrow after the close of business.

If you decided at 10:00 am to buy 100 shares and sell 100 shares at 11:00 am, both orders would process, but at the price one minute after close not the prices at 10 and 11 am. You get one trade per day and it happens when the day is over, with a handful of exceptions. They may all be institutional funds as well.

In other words, your buy and sell orders have to be made before you can know the prices that will be used to settle the trade. If at 10 am the price is $100 dollars and you sell but the market closes at $50, you will be paid 100x$50 for $5000 and not the $10,000 you thought you were getting.

The law put that mechanism in place to prevent speculation.

As far as I know, that rule is uniquely American. I would presume that other nations use other rules.