This is an update on my ongoing posts about mutual fund.
You might be interested to read my previous posts on the series
- Why You Should Invest in Mutual Fund
- How to Get Started in Mutual Funds
- Different Types of Mutual Funds
Now that i have explained how to get started investing in mutual funds and the different type of mutual funds, the next question to answer is how to get out? Meaning, what are the charges if i want to get back the money i invested in the mutual fund.
To answer the question, you should know about front-end load sales and back end load sales.
Front End Load Sales
With front end load sales, sales commission are deducted to the amount the investor will invest in the mutual fund. For example, if you invest P5,000, that amount will be reduced by the amount of sales commission and the remaining balance will be used to purchase shares in the mutual fund based on the net asset value. The advantage of this is that you can pull out your funds free of charge any time.
Back End Load Sales
With back end load sales no initial commission is deducted from the amount you invest. So for the P5,000 example that we have, all of that amount will be used to purchase shares in the mutual fund. You will only be charged sales commission when you decide to pull out your investment. The sales charge rate decreases over time. So if you put funds in year one then pull it out on year 3, the sales commission charge is lower compared if you have pulled it out in year 2. After five years, the sales commission rate is 0% or free.
With back end load sales no initial commission is deducted from the amount you invest. So for the P5,000 example that we have, all of that amount will be used to purchase shares in the mutual fund. You will only be charged sales commission when you decide to pull out your investment. The sales charge rate decreases over time. So if you put funds in year one then pull it out on year 3, the sales commission charge is lower compared if you have pulled it out in year 2. After five years, the sales commission rate is 0% or free.
In Numbers
So, let's set an example. You have P5,000 and you invested it in January 1, 2011 and the net asset value assumptions are as follows
Jan 1, 2011 - 1.5
Jan 1, 2012 - 1.6
Jan 1, 2013 - 1.7
Jan 1, 2014 - 1.8
Jan 1, 2015 - 1.9
Jan 1, 2016 - 2.0
In Summary
Investing in Mutual Fund entails costs. Same with other time of investment, you should begin your decision on your investment objective. Choosing between front end sales load or back end sales load should be based on whether you might need to pull out the investment or not. If you are in for the long term (which you should be) aim for the back end sales load so after five years, you benefit from free sales commission charge.
So that's it for now, if you have questions let me know.
