Back End Load Mutual Funds | Investing - YouTube

hey guys in this video I'm going to be explaining what are called deferred

sales charge mutual funds in Canada but there are similar structures like this

all around the world sometimes they're called back-end loaded funds or

declining sales charge funds but what I wanted to explain was the general

mechanism which is used around in Medicare different jurisdictions around

the world now not all mutual funds are sold like this but again I thought it

was important to explain hope you enjoy it

mutual funds with deferred sales charges or DSC funds investors can sometimes be

unpleasantly surprised to find out that selling their mutual funds can come with

stiff Redemption charges that they didn't remember agreeing to these

charges are known as deferred sales charges or DSCs here's an example of how

a typical deferred sales charge mutual fund might work let's start by listing

all the parties involved in this transaction first you are the investor

you are buying a mutual fund the mutual fund you are buying is managed by a

mutual fund manufacturer your financial adviser sells you the mutual fund and

the financial advisor works for a financial institution known as an

investment dealer if you had $10,000 to invest in a deferred sales charge mutual

fund your financial advisor places the trade for you and all $10,000 will be

invested into the fund which is managed by the mutual fund manufacturer a 5%

Commission which equals $500 in this case is paid by the mutual fund

manufacturer to the investment dealer who then splits it with the financial

advisor the question we need to answer is where does this $500 come from if all

of your $10,000 is deposited into the fund the mutual fund manufacturer will

typically borrow the $500 they cover the payments on this loan out of the

management fees they charge to you for running the fund the rest of the

management fees go toward the operation and profit of the mutual fund

manufacturer after a number of years they will have

paid off their $500 loan including interest but what happens if you decide

to take your money out of the mutual fund after one year the mutual fund

manufacturer will still have close to 400 dollars to pay off for example but

they are no longer collecting a fee from your holdings

that's where deferred sales charges come in these are charges directly incurred

by you when you sell your holdings deferred sales charges are charged

according to a schedule such as the following

if you were to sell your holdings within the first year you might be charged 6%

of the value of your holdings to sell selling year two and that rate might

drop to 5% over time usually seven years that rate eventually drops to zero and

thereafter there will be no deferred sales charges to sell your holdings so

let's assume the fund didn't change in value over the course of one year and is

still worth $10,000 but you decide to sell your holdings at

the start of year two you would be subject to a 5% deferred sales charge 5%

times $10,000 is $500 which allows the mutual fund manufacturer to pay off the

loan they took out to pay the commission to your financial advisor and their

investment dealer this is the basic framework for deferred sales charge

mutual funds and the upfront commissions that you indirectly pay for the actual

numbers vary slightly depending on the advisor investment dealer and specific

mutual funds used

you