A Back-End Load is a fee/commission investors pay when they sell/redeem their mutual fund units. This charge does not apply to all mutual funds, but some fund houses levy this charge to prevent early withdrawal and motivate an investor for long-term investment. Back End Load is usually expressed as a percentage of the total (value) of the sold units. Although it leads to a higher cost for exiting an investment, it helps fund managers stabilize by reducing short-term trading.
How Back End Load Works
When an investor sells their mutual fund units, the fund house deducts a Back-End Load, before processing the redemption amount. So if the exit load is 1% and the investor redeems units worth ₹1,00,000, the investor will get a net of ₹99,000 (i.e., ₹1,000 is deducted as a fee). This fee structure incentivizes investors to avoid frequent withdrawals, which can negatively affect the fund’s management and performance. The specific fund determines the basis point value and length of time the load applies.
What You Need to Know About Back-End Load
Here’s what you should know about Back-End Loads:
- Goal: It discourages frequent withdrawals and encourages a long-term hold.
- Calculation: Fee = (% on resale value) * Total value of units sold
- Applicability: Not to all mutual funds, depending on the fund house.
- Fees: The fee charged to the investor reduces to the redemption amount.
- Stability: It aids fund managers in keeping stability by decreasing short-term trading activity.
Conclusion
Mutual fund investors should note that a Back-End Load directly affects the amount of money you receive upon redemption of your units. It may look like an added expense, but it promotes long-term investment and ensures the fund is stable. If you are investing in mutual funds, check the fund’s exit load policy to know its impact on you.