Do you want to invest money in a fund? In this case, you should pay attention to the costs – including the front-end load. But what’s behind it? How much money do you have to plan for this?
If you have decided to move into one Funds or ETF there are various costs to invest. You should keep this as low as possible.
The reason: the higher the – often percentage – costs, the less income, called return, you get at the end of your investment. A crucial cost point when investing in funds is the so-called front-end load.
But what is that anyway? How is it calculated? And can I possibly even bypass him? An overview for beginners.
What is the front-end load?
The front-end load is the amount a bank or fund company receives for selling you a fund unit as an investor. In the financial language it is also called “Agio” (Italian for “convenience”) or “Load” (English for “burden”).
The English term is more appropriate for you as a private investor. Because a high front-end load reduces the return you get from an investment (see below).
The front-end load is determined by the fund company and given as a percentage. Unlike the other fund fees that are payable annually, this is a one-off fee that applies when you buy a new or additional fund share (see below).
This also applies if you invest money using a fund savings plan: In this case, you regularly buy a share in a fund for a small amount – and the sales charge is due with every purchase.
How much is the front-end load?
There is no general answer. It depends on the fund you want to invest in. Basically, however, the following overview will help you get your bearings:
Online brokers usually grant a discount on the front-end load. In this case one speaks of a “Fund discounter” (see below).
How is the front-end load calculated?
Two different methods can be used to calculate the front-end load.
1. Net method: This is the method that is usually used. The formula is as follows: [(Ausgabepreis / Rücknahmepreis) x 100] – 100 = sales charge in percent.
The percentage front-end load refers to the redemption price of the fund unit. This is the price you currently receive when a fund company buys you back a share of the fund. In contrast, the issue price is the price you currently have to pay for a fund share. Both prices change constantly due to supply and demand.
A example for the net method:
Assume that the issue price of a fund unit is EUR 250 and the redemption price EUR 242. According to the net method, the front-end load is: [(250 / 242) x 100] – 100 = 3.3 percent. Ultimately, you would have to pay 3.3 percent x 242 euros = 7.97 euros for a share of the fund.
2. Gross method: This method is rather unusual in Germany. The calculation is the same, but the percentage does not refer to the redemption price – but to the issue price.
A example for the gross method:
Issue price is EUR 250, redemption price EUR 242. The initial charge is therefore: [(250 / 242) x 100] – 100 = 3.3 percent. Ultimately, you would have to pay 3.3 percent x 250 euros = 8.25 euros, or 28 cents more.
How much does the front-end load reduce my return?
That cannot be said in general. In general, however, the longer you hold a fund unit, the less the front-end load is of relative importance. Because over time, the one-off costs pay for themselves.
A calculation example: You invest a one-off sum of 10,000 euros in an equity fund. The assumed return is a flat six percent per year. The initial charge is five percent. Note that these assumptions only apply to this example. In reality, you cannot be guaranteed a fixed return, and you will also incur additional costs in addition to the front-end load (see below).
- First case: Here you invest the 10,000 euros for five years. The cost of the sales charge is EUR 476.19. Your profit is 2,745.01 euros. The cost of the front-end load is around 17 percent of the total profit.
- Second case: Here you invest the 10,000 euros for 20 years. The cost of the sales charge is also EUR 476.19. However, your profit is 20,544.15. The cost of the front-end load is now only around two percent of the total profit.
In addition to the front-end load: Which costs will I have to face?
In addition to the front-end load, there are other costs that you will incur when purchasing a fund unit. An overview:
- Deposit costs: Since you first have to open a depot, you should always keep an eye on these fees. With many online providers and direct banks there are no costs for a deposit. With conventional banks and savings banks, a deposit can cost more than 20 euros a year.
- Administration fees: That is the cost, one Investment company for the fact that it offers and operates a fund. These costs are often summarized in the total expense ratio (“TER” for short). The costs of the funds can vary considerably, usually between 0.5 and 1.5 percent. ETFs are the cheapest here because there is no need to pay a fund manager to manage the assets (see below).
How can I avoid the front-end load?
Many banks or fund brokers offer discounts on fund shares. These providers usually call themselves “Fund discounter“. These discounts are often up to 100 percent, in this case the fund is also called” no-load fund “. Then the front-end load is completely eliminated.
But you should always consider such offers with caution. The reason: The fund brokers often only offer a discount because they add the costs elsewhere – often in the form of a higher management fee. In the long run, this in turn is more likely to be reflected in the return than a high front-end load.
Tip: If you want to invest long-term, which is recommended anyway, you would rather accept a higher front-end load than higher administration fees. If you want to invest at short notice, which is less advisable, you should pay a low initial charge.
Instead of investing in funds, you can also invest in so-called ETFs, also known as index funds. These are often significantly cheaper. The highlight with them: they are not controlled by a fund manager, which is why the management fees are very low. And the front-end load is also usually not applicable (see below).
Will the front-end load also apply to ETFs?
No, there is usually no front-end load for ETFs. That is because a Unlike a traditional fund, ETF is not actively managed – Instead, a computer algorithm replicates a stock index.
When buying an ETF share, however, so-called order fees are incurred. These are collected by the online broker for buying fund units for you on the stock exchange. However, the order fees are usually significantly lower than the front-end load, as are the management fees that also apply to an ETF investment.