Definition of Front end load

Front end load is the commission or fee deducted by mutual funds or insurance companies when initial investment is purchased. It is an amount deducted as source and hence reduces the size of an investment.

Brief Explanation of Front end load

For example, suppose an investor invests $ 100,000 in some mutual funds company and the front-end load percentage is 5 % then 100,000*5% = 5,000 is the front end load and the remaining amount of 95,000 would be used to purchase shares.

In the above example, now the investor needs a higher profit return, at least enough to reach his up-front amount of $ 100,000 in year one.

• It can also be considered as an agent, intermediary or broker fee.
• As broker helps investors find profitable securities, they charge their service charges.
• It is normally a percentage amount of the investment.
• It varies from company to company and fund to fund.
• Rate of insurance, mutual funds bonds and annuities are lower as compared to equity based mutual funds.
• Sometimes front end load is already included in the bid price making it look little expensive.
• Front end loads may also apply on reinvestment, capital gains and dividends.
• Front load sometimes discourages investors to reinvest as it takes away the cash in hand before even gaining any profit.
• Similar kind of fee is charged by the agent who sells the securities on investor’s behalf. It is called back end load.
• It is normally low in amount and can be fixed in rate.