Mutual funds can effectively charge ales fees in one of three ways: front-end load fees, 12b-1 (i.e. annual) fees, or deferred (i.e. back-end) load fees. Assume that the SAS Fund offers its investors the choice of the following sales fee arrangements: (1) a 3% front-end load, (2) a 0.50 percent annual deduction, or (3) a 2 percent back-end load, paid at the liquidation of the investor’s position. Also, assume that SAS Fund averages NAV growth of 12 percent per year.
A. If you start with $100,000 in investment capital, calculate wha an investment in SAS would be worth in 3 years under each of the proposed sales fee schemes. Which scheme would you choose?
B. If your investment horizon were 10 years, would your answer in part A change? Demonstrate why or why not.
C. Explain the relationship between the timing of the sales charge and your investment horizon. In general, if you intend to hold your position for a long time, which fee arrangement would you prefer?