Front End Load

Front End Load Definition

Front End Load refers to the commissions or the one-time charges deducted from the investments at the time of their initial purchase. It generally applies to mutual funds, insurance plans, and annuity plans. The load is removed upfront and the net amount afterload, which finally goes into the investment stream.

How Does it Work?

Front end loading is the charge paid as compensation to the financial mediators for finding and selling the desired investment as per the investor’s specifications. These are only one-time charges that only need to be paid originally at the time of purchase and not repeatedly. It reduces the amount of money invested as these charges are deducted from the primary deposit amount.

Front end loading is imposed as a percentage of the cumulative investment or premium paid either as a mutual fundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more, life insurance, or annuityAnnuityAn annuity is the series of periodic payments to be received at the beginning of each period or the end of it. An annuity is based on the PV of an annuity due, effective interest rate and time period. Annuity = r * PVA Ordinary/[1 – (1 + r)-n]read more. This percentage differs among investment companies but generally fluctuates within the spectrum of 3.75% to 5.75%. Lower front-end charges are levied in mutual funds, annuities, life insurance investments, etc., and comparatively higher charges are charged for equity-based mutual funds.

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Examples of Front End Load

Example #1

Let us assume that Mr.X has invested $1,00,000 in DSP Merrylynch’s mutual fund in the top 100 equity scheme. The Front End load applicable for the scheme is 5%. In this, the front end load for the transaction that will go to the investment company will be $1,00,000 * 5% = $ 5,000. Hence the actual investment in the equity scheme will be $1,00,000 – $5,0000 = $95,000. The Portfolio of Mr. X will reflect investments in mutual funds to the tune of $95,000. The risk-free rate of returnRisk-free Rate Of ReturnA risk-free rate is the minimum rate of return expected on investment with zero risks by the investor. It is the government bonds of well-developed countries, either US treasury bonds or German government bonds. Although, it does not exist because every investment has a certain amount of risk.read more is assumed to be 10%. So the fund house will have to generate a 15.79% yearly rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more to reach $1,10,000 i.e., at par had the $1,00,000 been invested in risk-free assets.

Example #2

Let us assume the Mr.A has invested $10,000 in a fund that has a front end load of 5% and the Intermediary commission of 10% of the 5% load charged. In this case, $10,000 * 5% = $500 will be the front end load, which shall be deducted from the Investments. Hence Mr. A’s investments will be recorded as $10,000  -$500  = $9,500 in the Assets in AccountingAssets In AccountingAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet.read more. For the fund house, $500 will be income generated of that 10% will be remitted to the intermediary for executing the trade. The commission paid to the intermediary will be $500*10% = $50. Thus the intermediary can generate $50 as income for recommending the right plan to the investor and increasing the inflow of the mutual fund.

Advantages

Disadvantages

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