A back-end load fund is a mutual fund that charges investors a fee at the time of selling their shares, rather than when they purchase them. Known as a contingent deferred sales charge (CDSC), this fee usually begins as a percentage of the amount being redeemed and gradually reduces the longer the shares are held, often dropping to zero after several years. For example, a typical schedule might start with a 5% exit fee if sold within the first year, decreasing by 1% each subsequent year until it disappears after five or six years.
This fee structure was developed to encourage investors to commit to long-term holdings rather than frequent trading, helping mutual fund companies cover sales commissions paid to brokers without deterring initial investments. Unlike front-end load funds, which charge a fee when shares are purchased, back-end loads can make entering a fund more affordable upfront but may result in costs upon exit.
Consider an example where an investor buys $10,000 worth of shares in a back-end load fund. If the investor sells within the first year, they could face a 5% fee, costing $500. Selling after six years, however, might incur no sales charge. This mechanism is designed to discourage short-term trading that can be costly to fund managers and other investors.
Investors who purchase mutual funds through brokers or financial advisors often encounter back-end load fees. These fees are disclosed in the fund’s prospectus, which should always be reviewed carefully to understand the exact terms. Sometimes, advisors may negotiate these fees based on the client’s investment size or relationship, allowing for reductions or waivers.
To minimize or avoid back-end load fees, investors can consider several strategies:
- Hold Shares Long-Term: The longer you keep your investment, the lower the fee, eventually reaching zero.
- Opt for No-Load Funds: No-load funds charge no sales fees when buying or selling shares, offering more flexibility.
- Review Fund Prospectuses: Always check the fund’s fee schedule before investing to avoid surprises.
- Discuss Fees with Advisors: Brokers may waive fees under specific circumstances.
It’s important not to confuse back-end load fees with redemption fees. While back-end loads compensate brokers for selling shares, redemption fees are typically smaller penalties paid to the fund itself to discourage rapid trading.
For investors new to mutual funds, understanding back-end load funds is crucial to managing costs effectively. Holding these funds long-term generally reduces fees and can align well with many financial goals.
For additional insights related to mutual fund fees, consider reviewing our No-Load Fund article, which explains funds without sales charges. For authoritative information, the SEC’s guide on mutual funds and fees provides detailed regulatory perspective.
Sources:
- Investopedia: Back-End Load Fund
- U.S. Securities and Exchange Commission: Mutual Funds and Investment Fees
- Consumer Financial Protection Bureau: Mutual Funds