Question

You are planning to invest $10,000 in a mutual fund. You find one that you like and notice that is offers two classes of shares. Class A shares have a 2% front-end load, 0.25% 12b-1 fee, and 0.50% management fee. Class C shares have no load, but carry a 0.50% 12b-1 fee and 1.00% annual management fee. If the fund earns 6% per year before fees and you plan to sell after seven years, which class do you pick? O Class A, it should be $412.44 higher 0 Class C, it should be $135.50 higher O Class A, it should be $195.35 higher O Class C, it should be $14.29 higher

Answer 1

Class A

Net amount invested = gross amount * (1 - front load %)

Net amount invested = $10,000 * (1 - 2%) = $9,800

Net returns per year = gross returns - 12b1 fee - management fee

Net returns per year = 6% - 0.25% - 0.50% = 5.25%

Future value = present value * (1 + rate of return)^{number of years}

Future value = $9,800 * (1 + 5.25%)⁷

Future value = $14,021.06

Class C

There is no front load, hence the net amount invested is $10,000

Net returns per year = gross returns - 12b1 fee - management fee

Net returns per year = 6% - 0.50% - 1.00% = 4.50%

Future value = present value * (1 + rate of return)^{number of years}

Future value = $10,000 * (1 + 4.50%)⁷

Future value = $13,608.62

The future value of Class A is higher by $14,021.06 - $13,608.62 = $412.44

Class A should be picked