Do you want to invest money in a fund? In this case, you should pay attention to the costs – including the initial charge. But what does it mean? How much money do you have to budget for it?
When you’ve made up your mind in one Funds or ETF There are various costs involved in investing. You should keep this as low as possible.
The reason: the higher the – often percentage – costs, the less income, known as the return, you will receive at the end of your investment. A key 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 it? An overview for newcomers to the stock market.
What is the initial charge?
The front-end load is the amount a bank or fund company receives for selling a fund unit to you as an investor. In finance, 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 issue surcharge reduces the return you get from an investment (see below).
The front-end load is determined by the fund company and stated as a percentage. In contrast to the other fund fees, which are due annually, this is a one-off fee that is charged when you buy a new or additional fund unit (see below). The surcharge applies immediately when purchasing the fund.
This also applies if you invest money with the help of a fund savings plan: in this case, you regularly buy a small amount in a mutual fund – and the front-end load is due for every purchase.
How high is the subscription fee?
There is no general answer to this. That depends on the fund you want to invest in. Basically, however, the following overview will help you for orientation:
Online brokers usually grant a discount on the front-end load. In this case one speaks of a “Fund discounters” (see below).
Brief explanation of the types of funds
- Pension funds: This invests in so-called bonds, which are basically loans that you can give to a company or a state. You will then receive interest for this.
- Equity funds: You invest the investor money in shares, i.e. company shares. As the value of a company increases, so does the value of its stock – you benefit from selling that stock.
- Real estate funds: These invest in real estate, e.g. apartments, office buildings or nursing homes. You can also benefit from selling or renting.
All three funds have one thing in common: You are active. This means that a fund manager decides on the composition of the investment fund – i.e. in which investment objects your money will be invested. This is why active funds are more expensive than passive ones. At passive funds, also ETFs called, a computer algorithm reproduces an index (see below).
How is the front-end load calculated?
You can use two different methods to calculate the subscription fee.
1. Net method: That is the method that is commonly used. The formula is as follows: [(Ausgabepreis / Rücknahmepreis) x 100] – 100 = issue surcharge in percent.
The percentage issue surcharge refers to the redemption price of the fund unit. This is the price that you currently receive if a fund company buys a fund unit from you. In contrast to this, the issue price is the price you currently have to pay for a fund unit. Both prices are constantly changing due to supply and demand.
A example for the net method:
Assume that the issue price of a fund unit is 250 euros and the redemption price is 242 euros. 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:
The issue price is 250 euros, the redemption price 242 euros. The subscription fee 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, i.e. 28 cents more.
How much does the front-end load reduce my return?
That cannot be said in general terms either. In general, however, the following applies: the longer you hold a fund unit, the less it falls Subscription fee relatively significant. Because over time, the one-off costs will be amortized.
A calculation example: You invest 10,000 euros in an equity fund once. The assumed return is a flat rate of six percent per year. The issue surcharge is a one-off five percent. Note that these assumptions only apply to this example. In reality, you cannot be given a fixed return promise, and you will have to pay additional costs in addition to the issue surcharge (see below).
- First case: Here you invest the 10,000 euros for five years. The cost of the issue surcharge is EUR 476.19. Your profit is 2,745.01 euros. The cost of the front-end load is therefore around 17 percent of the total profit.
- Second case: Here you invest the 10,000 euros for 20 years. The cost of the issue surcharge is also EUR 476.19. However, your profit is 20,544.15. The cost of the issue surcharge now only amounts to around two percent of the total profit.
In addition to the front-end load: What other costs will I have to pay?
In addition to the issue surcharge, there are other costs that you have to pay when buying a fund unit. An overview:
- Deposit costs: Since you first have to open a deposit, 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’s the cost, one Fund company for the fact that it offers and operates a fund. These costs are often summarized in the “Total Expense Ratio”, or “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 discounters“. These discounts are often up to 100 percent, in which case the fund is also called a” no-load fund “.
But: Fund brokers often only offer a discount because they add the costs again elsewhere – often in the form of a higher management fee. Usually there is also the so-called “Inventory commission“again. This amounts to between 0.1 and 0.9 percent and applies for the entire duration if you hold a fund unit.
So Attention: A high management fee is more likely to result in the long term Return lower than a high initial charge. Because it accumulates permanently – and not only when purchasing a fund share.
Tip: If you want to invest for the long term, which is recommended anyway, you are more likely to accept a higher issue premium than higher management fees. If you want to invest on a short-term basis, which is, conversely, less advisable, you should pay attention to a low initial charge.
Instead of active investment funds, you can also invest in so-called ETFs, also called index funds (see above). These are often much cheaper. And there is usually no front-end load (see below).
Is the issue surcharge also due for ETFs?
No, there is usually no sales charge for ETFs. That’s because a Unlike a traditional mutual fund, ETF is not actively managed – Instead, a computer algorithm replicates a stock index.
When buying an ETF share, however, so-called order fees apply. These are collected by the online broker for buying fund shares for you on the stock exchange. The order fees are usually much lower than the front-end load, as are the management fees that are also due for an ETF investment.