Back-End Load: Pros and Cons
Investing in mutual funds diversifies your portfolio as well and generates good income in the long run. There are several types of share classes namely Class A, Class B, Class C, and a few others. Every share class has a different structure, inimitable sales charges, and other expenses. The two common charges levied by mutual funds are front-end load and back-end load. This article discusses the latter followed by their pros and cons.
What is a Back-End Load?
Management of mutual funds entails cost at the time of entry and exit. The back-end load is an exit cost upon selling the shares linked to the fund. Also known as the sales charge, this fee is a part of the fund’s shares’ aggregate worth. Initially, the back-end load is high but eventually, the value diminishes to zero.
Here’s a small example for you to get a deeper insight into explaining how the back-end load works. Let’s say, Mr. Anil has parked Rs 10,000 in a mutual fund. He’s levied with a 3% back-end load. After a period, the fund investment grew to Rs 12,000, which Anil planned to withdraw. When Anil goes to redeem the amount, the fund would charge Rs 360 as a back-end load. Hence, Anil would be getting Rs 11,640 post deduction of the back-end load.
Mutual fund houses reduce the back-end load if the investor leaves the investment untouched until the elapsed time of the fund. You can avoid paying front-end load, however, you can do so when it comes to back-end load. No-load mutual funds and ETFs don't hold or carry back-end loads. Most investors reprobate the necessity of the contingent deferred fee as they are charged despite generating returns on the funds.
Fee Structures in Different Share Classes
Investors planning to splurge their money into investing in mutual funds must and should know the ABCs in line with the investment. Here, the ABCs are nothing but share classes - Class A, B, and C. Each share class comes with a set of perks and costs. The Class A shares carry a front-end load charge upon the purchase of mutual fund shares in the beginning. The fee can be anywhere in the range of 2.5 to 5 per cent.
Class B shares carry a sales charge or back-end load but no front-end load. When an investor sells the shares prematurely, upon withdrawing, they’ll incur a back-end load. For Class-B shares, the investor doesn't need to pay at the time of investing but only post-selling the shares.
Class C shares utilize the whole investment for the fund to grow and bear the back-end load like Class B shares. However, the operating expenses are a tad higher for Class C shares. Entitled as level load, there’s also a 12B-1 fee which adds up to the expenses.
Benefits of Back-End Loads
While some investors call back-end load expendable, it also possesses advantages as well:
- When an investor puts their earnings into the fund, the total investment is utilized for buying mutual fund shares.
- It helps investors fend off futile trading activities. Plus, imposes a back-end load after when the investor withdraws. As a result, discourages the investor to redeem the shares.
- No investor can eschew paying front-end load but can preclude from lavishing on the back-end load by keeping the investment for a long horizon.
- If you consider keeping the investment for at least 5 years or more, then opting for Class B shares will generate sound returns. You can enjoy the gains earned after selling the Class B shares without paying a hefty fee.
- The back-end load allows investors to pick or choose the fund wisely by taking their time. Additionally, the investor is given the opportunity to put the total funds to good use.
Cons of Back-End Loads
Just like every tale has a villain, the back-end load also has some criticisms:
- The operating expenses linked to the contingent deferred sales charge are excessive in nature when compared to the front-end load.
- The back-end load abbreviates the overall returns on the fund. Irrespective of whether an investor gains the returns on the fund or not, they still need to pay the back-end load.
- Several beginners get excited about the funds and earning capacity, and sporadically fail to notice the existence of a back-end load.
- The back-end load holds investors from withdrawing their funds before the ticking time period of the fund.
Frequently Asked Questions Expand All
Back-end load is the fee levied upon removing or redeeming the mutual fund’s shares from the fund. The back-end load can be calculated with this formulae: Net Investment Value equals Investment value at sale minus back-end load.
Frankly, there’s no absolute answer to this question. Both have their ebbs and flows and their share of differences. However, as an investor, you should be mindful of the charges and how it impacts your investment. Instead of worrying about the expenses and all other charges involved with the fund, consult professionals before purchasing the fund. It’ll help you build your portfolio appropriately in the long run.