What is a front-end load, and what is a back-end load?

Front-end load and back-end load are types of sales charges or fees that investors may encounter when purchasing shares of certain mutual funds. These loads are often associated with load mutual funds, and they impact how the sales commission or fee is assessed. Here's an explanation of each:

Front-End Load (Class A Shares):

1. Definition: A front-end load is a sales charge that is deducted from your initial investment when you purchase shares of a mutual fund. It is typically expressed as a percentage of the total amount you invest.

2. When It's Charged: The front-end load is assessed upfront, at the time of purchase. For example, if you invest $10,000 in a mutual fund with a 5% front-end load, the sales charge would be $500, and your actual investment would be $9,500.

3. Class A Shares: Front-end loads are often associated with Class A shares of mutual funds. These shares typically have lower ongoing expenses (expense ratios) compared to other share classes. The front-end load helps compensate financial advisors or brokers for their services in selling the fund.

4. Potential for Reduced Load: Some mutual funds offer breakpoint discounts on front-end loads for larger investments. As your investment amount increases, the percentage charged as a load may decrease. This can incentivize investors to invest more significant amounts to reduce the load.

Back-End Load (Class B Shares):

1. Definition: A back-end load, also known as a contingent deferred sales charge (CDSC), is a fee that is assessed when you sell or redeem your mutual fund shares. Unlike the front-end load, it is not deducted from your initial investment.

2. When It's Charged: The back-end load is not charged at the time of purchase. Instead, it is incurred when you sell your shares, typically within a specified holding period, such as five to seven years from the date of purchase. The CDSC percentage usually decreases over time, ultimately reaching zero.

3. Class B Shares: Back-end loads are often associated with Class B shares of mutual funds. These shares do not have upfront sales charges but may have higher ongoing expenses, such as 12b-1 fees. The CDSC helps compensate financial advisors or brokers over the holding period.

4. Holding Periods and Redemption Fees: The holding period during which you may be subject to the CDSC varies by fund but typically ranges from a few years to several years. If you redeem your shares before the CDSC schedule ends, you may incur a fee. After the CDSC schedule expires, you can redeem your shares without incurring this charge.

It's important to note that not all mutual funds have front-end or back-end loads. Some funds, known as no-load funds, do not charge sales commissions or loads, allowing investors to invest the full amount without deductions. When considering load funds, investors should carefully review the fund's prospectus and share class options to understand the fees, loads, and expenses associated with each class. Additionally, consider your investment time horizon and objectives when deciding between front-end and back-end loads.