What is a 'Back-End Load'

A back-end load is a fee (sales charge or load) that investors pay when selling mutual fund shares, and the fee amounts to a percentage of the value of the share being sold. A back-end load can be a flat fee or can gradually decrease over time, usually within five to 10 years. In the latter case, the fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero.

BREAKING DOWN 'Back-End Load'

A back-end load can also be known as a contingent deferred sales charge.

Back-end loads usually appear when a fund offers different share classes. Class A shares normally charge a front-end load, while Class B and Class C shares typically carry a back-end load. In essence, funds with share classes carry sales charges (as opposed to no-load funds). The class chosen determines the fee structure an investor pays.

Sales charges, or loads, are typically used by mutual funds and are a way for financial advisors to earn a commission on the sale of a fund's shares to investors. These mutual funds offer different share classes with different fee structures that investors can choose from. A back-end load should not be confused with a redemption fee, which some mutual funds charge to discourage frequent trading that can sometimes interfere with the fund's investment objective.

Fee Structures in Different Share Classes

Class A shares usually charge a front-end load, which is taken from an investor's initial investment. Class B shares typically don't have the front-end load, but instead may carry the back-end load that is charged when the investor redeems his mutual fund shares. Class C shares are considered to be a type of level-load fund, normally charging no front-end but levying low back-end loads. However, Class C shares tend to have higher operating expenses. In all cases, the load is paid to a financial intermediary and is not included in a fund's operating expenses.

Example of Funds with Back-End Loads

The Putnam Equity Income Fund Class B is one example of a fund with a back-end load. This share class of the $12 billion fund carries a maximum deferred sales charge of 5% and declines gradually until disappearing altogether in the seventh year. The fund also has an expense ratio of 1.66%, as of March 30, 2018.

How Back-End Loads Work

Consider an investment of $5,000 in a fund with a 5% back-end load that declines by 1% each year until it ends in year six. If the investment has increased to $5,500 by the second year, the investor owes $200, or 4% of $5,000, as the back-end load fee. In the end, the investor collects $5,300. In this way, mutual funds discourage investors from withdrawing their money in the short term.

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