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How a Back-End Load Mutual Fund Works

Posted on Thursday, December 27th, 2018 by MarketBeat Staff

How a Back-End Load Mutual Fund Works

Summary - Mutual funds have been called one of the best investment ideas of all time. They allow investors to purchase shares in small increments over a long period of time, and take the guesswork out of choosing individual stocks. Mutual funds are usually found in groups based on the mutual fund company that is offering the fund. Each fund family has a specific investment objective and can cater to an investor’s specific risk profile. The underlying securities that are a part of each fund are carefully chosen by a fund manager. 

However, for many investors, the idea of having an assortment of mutual fund options that exceed the number of flavors they can choose from at their favorite ice cream parlor can be intimidating. This is one reason why many investors still choose to purchase a "load fund". A load is a sales charge that is paid as a commission to a financial professional in return for the advice that they offer investors in selecting funds that match their investment goals. A load can either be charged at the time shares are purchased (i.e. a front-end load) or at the time an investor redeems shares (a back-end load). 

Back-end loads are typically between 4%-6% and are either charged as a fixed fee that investors pay any time they redeem shares or as a sliding fee that reduces in defined increments over a period of time (usually five to ten years) until there is eventually no load charged upon redemption. However, the other service fees involved with a mutual fund are generally higher for funds with a back-end load as opposed to a front-end load. 

Back-end load funds can be a wise investment option for investors who have the discipline to stay in a fund for the length of time it takes to zero out the load charge. In this case, they may find that the fund’s total return will surpass that of a comparable no-load fund. However, there is no evidence to suggest this is true. 


It can be quite intimidating for investors to look at the menu of mutual funds that are available to them. In fact, the number of mutual fund companies and associated fund families outnumbers individual stocks. In addition to funds that serve different purposes (i.e. stock funds, bond funds, index funds, etc.), there are load funds and no-load funds. While many financial advisors will steer their clients away from load funds, they can serve a purpose if investors understand the costs and have a reasonable expectation of a total return that will exceed the cost of any mutual fund fees.

There are three types of load funds. A front-load fund which charges a fee when an investor buys shares, a rear-load fund which charges a fee when an investor goes to redeem shares, and a level load fund which charges a commission that is paid to the fund through annual fees. 

This article will focus on back-end load funds. We’ll define what a back-end load fund and provide examples for how a back-end load is charged. We’ll also review the benefits as well as the risks associated with investing in a back-end load fund. 

What is a back-end load?

A back-end load is a sales charge (or commission) that an investor pays when they sell shares in a mutual fund. Back-end loads are charged on class B shares of mutual funds. This is a distinction from class A shares that charge a front-end load and class C shares that charge what is called a level load. 

The amount of a back-end load typically ranges from around 4% to 6% of the fund’s net assets. A back-end load can be a flat fee that will occur no matter how long the shares are held. However, in many cases, a back-end load will decrease by a fixed percentage for several years until it eventually disappears completely. When this is the case, the fee is always at its highest the first year and will steadily decline in subsequent years. This is one way a back-end load can discourage investors from withdrawing money in their mutual funds. Although a back-end fee is sometimes referred to as a one-time charge, it will be charged every time an investor chooses to redeem shares. This means this fee may be paid more than once over the period of a time an investor has assets in the fund. 

A back-end load is also referred to as a contingent deferred sales charge (CDSC). This reflects the fact that, in many cases, the sales charge is contingent (i.e. only triggered) if the investor sells shares prior to the period in which the fee still applies. 

The amount of a back-end load is based on the net asset value (NAV) of an investor’s mutual fund balance at the time of the redemption. This means that if the value of their investment has gained 20% and they are faced with a 4% back-end load, their net gain will be 16%, not counting any other fund charges. 

If an investor is investing in a mutual fund as part of a company retirement plan, such as a 401(k), the sales charge is typically waived. Part of the reason for this is that, in many cases, investors are limited to the fund options provided by their employer and may not have the ability to choose no-load funds. 

How a back-end load works

First, let's look at an example where an investor pays a flat 5% back-end load. If they made an initial investment of $2,000 the full amount would go into the purchase of fund shares. After two years, the fund has achieved a 10% gain. The value of the shares is now $2,200 ($2,000 x .10 = $200). However, the investor decides to sell his shares. At this point, he is charged a flat 5% fee or $100. So the investor pockets only a $100 gain ($2,200 - $100 = $2,100). This does not include any other fees that may have been deducted from his fund such as 12b-1 fees and other service charges needed to cover the fund’s operating expenses. 

Now let’s look at a similar example with a 5% back-end load that declines by one-half percent every year for ten years. In this example, the investor keeps his initial $2,000 in the fund for four years. In that time, his shares have gained 18 percent. So the value of his shares is $2,360 ($2,000 x .18 = $360). At this point, the investor decides to sell his shares. Because he has held the shares for four years, the back-end load is now 3%, not the full 5% from the beginning. So he would pay a fee of $70.80 (2,360 x .03 = 70.80). This means he would receive $2,289.20. As with our previous example, this example does not factor in other fees that may have been deducted for the time the shares were held. 

While it would seem pretty obvious that an investor can avoid the financial cost of a back-end load by simply holding shares for a longer period of time, there is growing evidence that mutual fund investors are becoming increasingly likely to sell their shares within five years. 

A back-end load is not a redemption fee.

One of the common ways a back-end load is incorrectly defined is as a redemption fee. While both are charged at the point when fund shares are sold, there is a major distinction. A back-end load is essentially a commission that is paid to a fund manager for providing their expertise in fund selection and advice. A redemption fee is a penalty placed on sales that are made within a specified time frame (typically 30 days). The redemption fee is in place to avoid having investors engage in short-term trading. Mutual funds are generally expected to be long-term investment instruments. When investors engage in short-term trading, they increase a fund's operating expenses and require the fund to maintain a larger cash position to ensure they can manage sell orders. For this reason, a redemption fee acts as a deterrent to trading. 

Other fees associated with load funds

A load, whether placed on the back-end or front-end is not part of a fund’s operating and management expenses. Every investor is encouraged to understand the real cost of investing in a fund because the fees charged can diminish their total return. A common fee associated with mutual funds is a 12b-1 fee. This fee pays for the marketing and distribution costs associated with the fund. It has become the source of controversy for many years. The 12b-1 was created when mutual funds were still a relatively new investment option. Today, they are commonplace and there is a question if these funds actually serve their purpose. In many cases, fund companies have reduced these fees significantly and some, although not many, have done away with the fee altogether. A mutual fund also charges other service fees that take into account the day-to-day operating expenses of the fund. One example is the yearly maintenance fee charged to shareholders. All the fees associated with a mutual fund are contained in the fund’s prospectus. Investors should take care to review the fee table for each fund before deciding on whether to invest in it. This is particularly true if there is a sales load involved. 

A key difference between a front-load fund and a back-load fund is that with a back-load fund many of these associated fees will be higher. That is done with the knowledge that investors are not paying an upfront load and, in many cases, can offset the load entirely. However, the ability to have their entire initial investment go into purchasing shares may offset that cost in part or in its entirety. 

Do back-end load funds outperform no-load funds?

This is a source of endless debate, but there is no clear evidence to suggest that a loaded fund outperforms a no-load fund. This doesn't mean, however, that a no-load fund is always a better option. In the case of a fund with a back-end load, there may be lower 12b-1 fees or other operating expenses. Over time, particularly in the case where the back-end load goes to zero, a back-end load may provide a significantly higher return. The issue is one of discipline. If an investor is willing to buy the shares and hold them, at least until the period of the load expires, they can see a higher total return. 

Benefits of a back-end load

The primary benefit to a back-end load is that, unlike with mutual funds that charge a front-end load, all of an investor’s money goes into purchasing fund shares. Additionally, because the sales charge decreases over time (in many cases), an investor who is willing to hold shares for the length of time that is required to avoid the fee can avoid paying a fee entirely. 

Another benefit to a back-end load is that, for novice investors, the back-end load gives them access to a financial professional who makes fund selections. Since there are more mutual fund options than there are individual stocks, having a knowledgeable financial professional choosing the fund helps ensure that an investor is matched with a fund that supports their investment goals and their risk tolerance. 

Risks of a back-end load

The operating expenses associated with a back-end load fund are generally higher than those of a front-load fund. Since an investor needs to look at the total expense as it relates to whether or not to own a particular fund, the cost of other fund charges can make owning a back-end load fund more punitive than a front-load fund where the expense is charged in the initial transaction.  

The final word on back-end loads

A back-end load is a fee charged by a mutual fund company that an investor pays when they redeem shares within a certain period of time after investing in the fund. The back-end load is also referred to as a contingent deferred sales charge (CDSC). This reflects the fact that the sales charge is contingent upon the sale of shares. This is one of the key ways that a back-end load is different from a front-end load. In a front-end load fund, an investor will pay a transaction fee (or commission) at the time they purchase their shares. 

Back-end loads are commissions that are paid to investment advisors in exchange for their expertise in selecting funds. Since the number of mutual fund options that are available today greatly exceeds the number of individual stocks, this can be a benefit to the novice investor who wants to ensure a particular fund matches their investment objective and overall risk tolerance. 

Back-end loads are generally slightly lower than a front-end load and, in many cases, they step down in specified increments over time (usually five to 10 years) until the load is zero. However, the operating expenses and other fees associated with mutual fund ownership can be higher with back-end load funds so an investor must pay particular attention to the fund’s total annual expenses to see if they will get a better total return.

There is no evidence that back-end load funds, or any load fund for that matter, increase an investor’s total return when compared to a comparable no-load fund. Therefore the choice of whether to invest in a fund with a back-end load should be based on other factors such as the performance of the fund over time. 

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