Definition
A Back-End Load is a fee or charge that investors pay when selling their investments or mutual fund shares. This fee, also known as a contingent deferred sales charge (CDSC), typically decreases over time and eventually drops to zero if the investor holds the shares for a long enough period. Therefore, it serves as an incentive for long-term investment.
Key Takeaways
- Back-End Load is a fee or sales charge that investors pay when they sell or redeem shares from a mutual fund, typically within a set number of years of the date of their original purchase.
- These fees are mainly designed to discourage quick, speculative trading and short-term investing, and they are not applicable if investors hold onto their investments for a longer period of time.
- The value of the Back-End Load usually decreases over time. This means the longer you hold the investment, the lower the charged fee will be upon sale or redemption. After a certain period, this fee often drops to zero.
Importance
The finance term “Back-End Load” is important as it refers to a fee or sales charge that investors pay when they sell their investments or mutual fund shares, often related to the costs associated with the sale of assets.
This fee is a percentage of the value that is being sold, making it crucial to investors who are planning to liquidate their assets.
The back-end load can significantly impact an investor’s net returns, especially in cases when the fee is high.
It also affects decision-making because investors are usually inclined to hold onto their investments for longer periods to avoid paying these fees.
Hence, understanding the implications of a back-end load is critical for effective investment planning and portfolio management.
Explanation
The term “Back-End Load” refers to a fee that investors have to pay if they decide to sell particular mutual fund shares during the early period of the investment. The primary purpose of this fee is to discourage investors from short-term trading and to motivate them for holding the investment for a longer period of time.
This fee is typically decreased over time and eventually dropped to zero if investors hold their shares long enough. Mutual fund companies often utilize back-end loads to compensate for the commissions that are paid to brokers.
The use of back-end load in a mutual fund investment approach can actually beneficial to some investors, especially those who start with a low initial investment and wish to hold their shares over an extended period of time. This is because back-end loads, unlike front-end loads, give investors the opportunity to use the entire initial investment to purchase fund shares and grow their investment without any upfront deductions.
To sum up, the purpose of back-end load is primarily to influence and guide the behaviour of investors towards a profitable long-term investment strategy.
Examples of Back-End Load
Mutual Funds: One of the most common examples of back-end load would be in a mutual fund where an investor pays charges when they decide to sell their shares. For instance, if an individual invests $10,000 in a mutual fund that has a 1% back-end load, they will be charged $100 when they decide to sell their fund.
Insurance Policies: Certain insurance policies such as annuities might also have a back-end load. There could be surrender charges involved when the policyholder decides to sell or surrender the insurance policy before a certain time period. This time period usually decreases annually and becomes zero after a number of years.
Certain Retirement Plans: Some retirement plans or accounts such as 401k plans or IRAs might have back-end load fees. If an individual withdraws their money before reaching a certain age (typically
5 years old), they will be subject to a penalty fee. This fee can act like a back-end load, charged upon withdrawal of the investment.
FAQs about Back-End Load
1. What is Back-End Load?
Back-End Load is a fee that an investor must pay when they sell, or redeem, certain types of investments, like mutual funds or insurance policies. This fee is a percentage of the value of the investment that is sold.
2. Is Back-End Load always applicable?
No, Back-End Load is not always applicable. It generally applies to Class B shares in mutual funds, and it declines over time. This means the longer an investor holds their shares, the lower the back-end load will be when the shares are sold.
3. How is Back-End Load calculated?
The Back-End Load is calculated as a percentage of the total value of the investment being sold. This percentage usually decreases over time according to a schedule set by the investment company or mutual fund.
4. Is it possible to avoid paying a Back-End Load?
Yes, it is possible to avoid paying a Back-End Load by holding on to the investment until the Back-End Load period ends. Alternatively, some funds may not have a Back-End Load and instead, use other types of fees or charges.
5. How does Back-End Load impact the return on investment?
Back-End Load can impact the return on investment by reducing the amount of money an investor receives when they sell their investment. As such, it is essential to take these fees into account when calculating the potential return from an investment.
Related Entrepreneurship Terms
- Redemption Fee
- Mutual Fund Shares
- Deferred Sales Charge (DSC)
- Front-End Load
- Expense Ratio
Sources for More Information
- Investopedia: This is a trusted resource with an extensive library of articles and videos about the financial industry, including the term Back-End Load.
- The Balance: A comprehensive personal finance website offering valuable insights and advice on investments, including back-end loads.
- Morningstar: A leading provider of independent investment research that also highlights key terms and strategies including Back-End load.
- U.S. Securities and Exchange Commission (SEC): The SEC is a government agency that regulates the financial markets. It has a lot of useful information about financial terms such as Back-End Load.
