Legal Definitions - front-end load

A front-end load refers to a sales charge or commission that an investor pays at the time of purchasing an investment, most commonly shares in a mutual fund. This fee is deducted directly from the initial amount invested, meaning that a smaller portion of the original capital is actually put to work in the fund. It compensates the broker or financial advisor for their services in selling the fund.

• Example 1: Retirement Savings

  Sarah decides to invest $10,000 into a specific mutual fund as part of her retirement savings strategy. Her financial advisor recommends a fund that carries a 4% front-end load.

  How it illustrates the term: When Sarah makes her investment, $400 (4% of $10,000) is immediately deducted as the front-end load. This means only $9,600 is actually invested in the mutual fund, demonstrating that the fee is taken "up front" from her initial capital before any money is put into the fund's assets.

• Example 2: College Education Fund

  The Miller family wants to start a college fund for their newborn child and decides to put $5,000 into a mutual fund designed for long-term growth. The fund's prospectus clearly states a 3.5% front-end load.

  How it illustrates the term: Upon making their initial $5,000 investment, $175 (3.5% of $5,000) is subtracted as the sales charge. The remaining $4,825 is what actually purchases shares in the college savings mutual fund, showing the immediate reduction of their investment due to this upfront fee.

• Example 3: Diversifying an Investment Portfolio

  David, an experienced investor, decides to add a new sector-specific mutual fund to his diversified portfolio, investing $25,000. This particular fund has a 5% front-end load.

  How it illustrates the term: Before any of his money is invested in the fund's underlying assets, $1,250 (5% of $25,000) is paid as the front-end load. Consequently, $23,750 is the actual amount that begins to grow within the fund, highlighting how the load impacts the effective starting capital for the investment.