Introduction
A back-end load is defined as the fee charged on the redemption of mutual funds. The fee, to be paid by the investor, is a percentage of the fund shares' total value. It can either be a predefined percentage or can be revised over time.
In some mutual funds, the back-end load of a mutual fund scheme reduces over time. For instance, a mutual fund scheme held for more than five years will have a lower back-end load when compared to a holding period of one year, when it is the highest.
Understanding Back-End Load
Let us assume that you have invested Rs.20,000 in a mutual fund scheme with a 4% back-end load. After holding the mutual fund for a particular period, you notice that your investment has grown to Rs.24,000 which you decide to redeem.
Once you initiate the redemption process, the back-end load of Rs.960 (Rs.24,000 x 4/100) will be levied by the fund house. This means that you will only be receiving Rs.23,040 once the back-end load has ben deducted.
Further About Back-End Load
Back-end loads are one of the most commonly criticised mutual fund expenses in the twenty-first century. Most investors consider them as an unnecessary expense because they are levied irrespective of the returns.
Also, investors who withdraw prematurely to meet unanticipated expenditures will have to pay a back-end load when selling their mutual fund shares. Also, most investors do not pay heed to the back-end load when investing in mutual funds for the first time. This can cost them dearly when redeeming their shares later.
Despite the criticism, back-end loads can be avoided if investors hold their mutual fund shares for a holding period of more than five years. Also, back-end loads discourage investors from frequently trading and premature withdrawals of mutual fund schemes.
