If you have been dabbling in the great financial gamble of mutual funds for any period of time, you must have been surely asked your opinion on front-load mutual funds and back-load mutual funds and which one to go for, especially by novices. Load is nothing but sales fee, which is the amount you pay to your broker for trading your fund. There are two kinds of loads, front-load and back-load. Front-end load usually goes to the dealers and negotiators who have a hand in selling off your share, which is directly deducted from the money you invest. Contrary to this, a back-end load is a nominal percentage that goes as the sales charge paid to the brokers in an agreed time, mostly five to ten years. This fee will be at its peak in the initial year though it will come down by a specific percentage annually until the end of lock-in period. By then the charge will be zero, which will become a no-load fund.
Many previous dialogs on the topic have solely addressed the performance appraisals. Even the top rating experts in the field have sometimes expressed their doubts on this aspect. But it is not enough to gauge the performance alone and sit back complacently. There is a need for careful scrutiny and contemplation here.
- Enquire about the seller of the mutual fund share: Majority of the load mutual funds are being transacted via brokerage companies, financial architects and registered experts. With a few exceptions, most of these entities exist to sell as much products as they possibly can. Depending on the product, you as a investor could be levied a certain percentage as fee upfront. It could also be a back-end charge as explained above, which varies from four to six percentage.
- Research to know why the load fund is being sold: To put it bluntly, your financial growth is not their priority. They will have their own reasons for the decision to sell the share. Their concern is to make as many sales as they can and to get you to buy shares frequently. This is how they earn commission and also build credibility for their service. It is your job to find out why and if it benefits you and to what extent.
- Find out who endorses the fund: Mutual funds are either promoted by the mutual fund firms directly or via virtual comparison-and-rebate companies like Fidelity and Schwab. The benefit you have here is the boundless selection of mutual funds under a single umbrella. You do not even have to start different accounts for different funds. Nearly every investment consultants maintain contact giant discount houses so that they can update clients about any front-load mutual fund or back-load mutual fund in the market. Rest assured, that there is no secret agenda in trying to sell you a specific product.
- Figuring out if it is the right fund for you? Whether you have a preference for front-load mutual funds or back-load funds, you can reap returns or hit a rock bottom either way. Even with no difference between the times when the fee is deducted, the performance of mutual funds can be a tad unpredictable.
Summing it up:
Front-load fund verses back-load fund is never the issue. Rather, planning it out methodically and securely is the key. Checking the fee amount is important, but that is not the only thing. Relying on reputed consultants to tell you when to purchase a mutual fund, when to sell it off and when not to do either is. This will help you build your financial base rather than relentless pondering about fees.
GST rate of 18% applicable for all financial services effective July 1, 2017.