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In: Finance

Suppose that you have a choice between two mutual funds, one a load fund with no...

Suppose that you have a choice between two mutual funds, one a load fund with no annual 12b-1 fees, and the other a no-load fund with a maximum 12b-1 fee. How would the length of your expected holding period influence your choice between these two funds?

Solutions

Expert Solution

  • Load Fund with no annual 12b-1 fees:

In this investor need to pay load charges on shares bought to pay broker or fund manager.

In this case payment is made for funds bought on front end load, back end load or level load.

  • No load fund with max 12b-1 fee:

In this investor is not supposed to pay load on each fund rather he/her has to pay annually at the rates specified.

In this two case

For the first one: holding period should me maximum to reduce its cost of load fund because as long as we hold its cost per annum will get reduced. Because when ever we switch it over it will occur again and will overall increase the cost of investment.

In second case: Holding period is not so relevant as there is no load fund but there is max 12b-1 fee which is fixed annual expense. It does not matter that how many time you switch in or out or bought new fund.

SO, In the first case Load Fund with no annual 12b-1 fees I will prefer long term holding. And for No load fund with max 12b-1 fee, it will not influence my holing period.

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jeff jeffy answered 5 months ago
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