The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually.

The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually.

a.	If you plan to sell the fund after four years, are Class A or Class B shares the better choice for you?
	Class B

b.	What if you plan to sell after 15 years?
	Class A

Explanation:

a. 

Suppose you have $1000 to invest. The initial investment in Class A shares is $940 net of the front-end load. After 4 years, your portfolio will be worth:

$940 × (1.10)4 = $1,376.25

Class B shares allow you to invest the full $1,000, but your investment performance net of 12b-1 fees will be only 9.5%, and you will pay a 1% back-end load fee if you sell after 4 years. Your portfolio value after 4 years will be:

$1,000 × (1.095)4 = $1,437.66

After paying the back-end load fee, your portfolio value will be:

$1,437.66 × 0.99 = $1,423.28

Class B shares are the better choice if your horizon is 4 years.

b.

With a 15-year horizon, the Class A shares will be worth:

$940 × (1.10)15 = $3,926.61

For the Class B shares, there is no back-end load in this case since the horizon is greater than 5 years. Therefore, the value of the Class B shares will be:

$1,000 × (1.095)15 = $3,901.32

At this longer horizon, Class B shares are no longer the better choice. The effect of Class B's 0.5% 12b-1 fees cumulates over time and finally overwhelms the 6% load charged to Class A investors.