What Is Back End Load?
A back end load (also known as a sales charge or an exit fee) is a commission or sales fee. Investors pay back end loads when selling their investments, which are commonly associated with mutual funds and annuities.
The fee is usually a percentage of the current value of the fund’s shares, with the amount gradually decreasing over time. Some investments decrease their back end load mutual funds to zero if the investor holds onto their shares until the holding period is over. The holding period is the time between the purchase and sale of an asset.
Share Classes and Back End Load
A share class is a classification that’s put on mutual funds and other types of investments. It’s usually differentiated using letters (e.g. “Class A”), and each provides different rights and privileges for investors and the mutual fund. For instance, different classes have various minimum investment requirements, expense ratios, and back end loads.
Typically, Class B and Class C shares will have a back end load. When the investor redeems, i.e., sells, shares, the investor will need to pay the back end load. Class A shares will have a front end load, paid upfront, when the investor buys shares. In other words, funds with all share classes will have sales charges that depend on the chosen class.
Example of Back End Load Mutual Fund
Let’s say you invested $100,000 in a mutual fund with an initial 5% back end load. This goes down to 3% at the end of the holding period of 36 months. Within 24 months, you decide to sell the mutual fund. You’d be charged the 5% back end load (since you’re still within the holding period).
When you go to sell the fund, you find that the investment has grown to $110,000, or a gain of $10,000 or 10%. You’d need to pay the back end load of $5,500 and would end up with $104,500 after the sale was completed. Your net return would be $4,500 or 4.5%.
Back End Load Calculation
Calculating the back end load involves finding the percentage of your investment's current value:
Say that you want to sell your investment in a mutual fund that is currently valued at $50,000. Since there’s a 3% back end load, you’ll need to pay:
$50,000 x 3% = $1,500
This means you’ll need to pay $1,500 when selling your mutual fund shares.
Pros and Cons of Back End Load in Mutual Funds
As with any investment vehicle, the best choices depend on multiple factors. Mutual funds with back end loads have their fair share of criticism, but there are a few advantages to them.
Back end loads can discourage unnecessary early withdrawals and overtrading. In other words, their high fees often serve as a deterrent for someone looking to cash in on their investments. Plus, investors may be able to avoid back end loads if they hold the fund until long after their holding period. Of course, this depends on the individual fund, so it’s better to check the fine print.
However, many experts believe that back end loads are an unnecessary expense for most investors. Plenty of investment options don’t charge these types of fees, like exchange traded funds (ETFs) and other “no-load” mutual funds.
Besides, back end loads add to the fees you’ll pay, reducing the net returns you’ll receive on your investment. While investors do have to pay some sort of fee to invest, there are options that would have them paying less.