A _______________ is paid when selling the fund.
Option A: Turnover charge
Option B: None of these answers apply
Option C: Back-end charge
Option D: Commission
Option E: Front-end charge
Answer (2)
The correct answer to the question is Option C: Back-end charge .
In the context of mutual funds and other similar investment funds, a back-end charge, also known as a contingent deferred sales charge (CDSC), is a fee that investors pay when they sell shares of a fund within a certain time period. The fee is designed to discourage short-term trading of mutual fund shares.
Here's a step-by-step breakdown of how a back-end charge works:
Purchase of Fund Shares: When an investor buys shares in a mutual fund, there may not be an immediate fee (unlike a front-end load which is charged at the time of purchase).
Holding Period: The back-end charge is dependent on how long the investor holds onto their fund shares. Often, the fee decreases the longer the investor holds the shares, eventually disappearing after a certain period, such as 5 to 7 years.
Sales of Fund Shares: If the investor decides to sell the shares before the specified period ends, a back-end charge is applied.
Purpose: The intention of imposing this charge is to encourage investors to commit to long-term investing, which typically aligns better with mutual funds' investment strategies.
Understanding these charges is important for investors who want to minimize costs and strategically plan their investments. This information falls under the 'Business' category as it relates to financial products and investment strategies.
The correct answer is Option C: Back-end charge. This fee is applied when an investor sells their mutual fund shares before a specific holding period, encouraging long-term investment. Understanding back-end charges aids investors in making informed financial decisions.
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