A mutual fund has a 5% front-end load fee, and you’re being asked, what percentage the fee would represent of the net amount invested? This is one of those questions where a student may think, “Wait, this is just too easy. Isn’t the answer simply 5%?” But that is not the right answer. Let me show you a neat little trick where you can ignore most of the information provided. All you need is the front-end load fee itself.
Assume you have $100 to invest. If you’re being charged an upfront load fee of 5%, the fee would be $5, right? So let’s break down that $100 investment. $5 would go towards the load fee. The remaining $95 would be invested into the fund. If we divide the $5 fee into the $95 that is left over to invest in the fund, we get a percentage of 5.26%. So, while the front-end load fee is only 5%, that fee represents 5.26% of the net amount actually invested into the fund. Let’s go ahead and pick that answer, and we’re correct.