Mutual fund companies collect some charges from investors when they join or leave a mutual fund scheme. This charge is generally referred to as a 'load'.
Front-end Load
Front-end load or Entry load are the charges charged from an investor while entering a scheme or joining the company as an investor.
Generally, front-end load is collected to cover marketing costs expended by the company. Different mutual funds companies charge different fees as an entry load. However in some countries, there's no front-end load.
Back-end load
Back-end load or Exit load are the charges charged from an investor while exiting a scheme or leaving the company as an investor.
Mutual funds help in the direct growth of the economy, hence even the government wants people to save their money, and stay active in financial schemes. Generally, Back-end load is charged to discourage investors from exiting from the mutual funds.
Calculation
The unit price of Equity Linked Savings Scheme (ELSS) of a mutual fund is 10/-. The public offer price (POP) of the unit is 10.204 and the redemption price is 9.80.
Calculate:
(i) Front-end Load
(ii) Back end Load
Front-end load = Say a person X has to pay 10.204 for a mutual fund having price 10. The difference of 0.204 is Front-end load. In percentage = 0.204/10 * 100 = 2.04%
Back-end load = Say a person X receives at maturity 9.8 for a mutual fund having price 10. The difference of 0.2 is Back-end load. In percentage = 0.2/10 * 100 = 2%