Mutual funds can effectively charge sales fees in one of three ways: front-end load fees, 12b-1 (annual) fees, or deferred (back-end) load fees. Assume that the SAS Fund offers its investors the choice of the following sales fee arrangements: (1) a 3 percent 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.

If you start with $100,000 in investment capital, calculate what an investment in SAS would be worth in three years under each of the proposed sales fee schemes. Which scheme would you choose?

If your investment horizon were 10 years, would your answer in part (a) change? Demonstrate.

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?