Back-end Load - Explained
What is a Back-end Load?
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Table of ContentsWhat is a Back-End Load?How is a Back-End Load Used?Fee Structures in Different Share ClassesExample of Funds with Back-End LoadsHow Back-End Loads Work
What is a Back-End Load?
A back-end load is defined as a commission or sales fees that investors pay when they sell their investments. Back-end load is commonly associated annuities and mutual funds, an investor selling a mutual fund is required to pay a percentage of the value of the investment being sold as the back-end load. A back-end load is otherwise referred to as a sales charge, or contingent deferred fee. It is often high in the first year of holding an investment and decreases gradually until the holding period is over, a back-end load can decrease to a zero level.
Back to:INVESTMENTS & TRADING
How is a Back-End Load Used?
Generally, funds that have share classes attract sales charges, investors trading these shares are required to pay a commission before selling them. Financial advisors or funds manager earn a commission through the back-end load. This is the commission or sales fee that an investor is charged when selling a share or an investment. Also, different classes of shares attract different sales charges, for instance, Class A shares attract a front-end load while Class B and Class C shares have backend load. Since mutual funds offer different share classes, different fee structures or sales charges exist. However, it is essential to clarify redemption fee for a back-end load, both are different terms. Some mutual funds charge redemption fees to enhance the stability of funds and prevent incessant trading.
Fee Structures in Different Share Classes
In mutual funds investment, a front-end load is a commission or sales charge that an investor is exposed to at the initial purchase of an investment, this is different from a back-end load. Different share classes have different sales fees associated with them. Class A shares are the only category of shares that are charged a front- end load, Class B and Class C shares do not have a front-end load. Class B and Class C shares however carry back-end load which is charged when an investor wants to sell a share or an investment.
Example of Funds with Back-End Loads
Typically, Class B and Class C shares carry back-end loads, Class C however have lower sales fee than their counterpart. That is an example of a fund with back-end loads; Take the Putnam Equity Income Fund Class B shares for example, shares in this class of funds attract a maximum of 5 % as deferred sales charge but this percentage reduces as the holding period gets longer. The back-end load gradually declines till it gets to a zero level in the seventh year or thereabouts. In March 2018, this share class of the $12billion fund had an expense ratio of 1.66%.
How Back-End Loads Work
A sales fee or charge that investors are required to pay when selling mutual fund shares is known as back-end loads. A back-end load is a percentage of the value of the mutual fund share being sold. For example; an investment of $500 with a sales fee of 5% which is designed to reduce by 1% every year and the back-end load disappears in the sixth year. An increase in the investment maybe in the second year will also translate to a back-end load fee of 4% since the back-end load is meant to decrease by 1% every year.