The Effect of 12b-1 Fees on Your Mutual Fund Investment
See how share classes and 12b-1 fees can affect your mutual fund investments.
Example of the Impact of 12b-1 fees and Loads
This example illustrates the how 12b-1 Fees and Loads can hurt your
portfolio's growth.
The Scenario:
A broker recommends a fund for you, let's call it "Fund X", which
has two different share classes. Class A carries a front-end load (meaning the
sales charge is deducted immediately) of 3%, but no 12b-1 fees. Class B
has a 3% load if you sell in the first year, a 2% load if you sell in the 2nd
year and no charge if you hold it for 3 years or more.
The Decision:
Since you are committed to holding the fund for 7 years, the Class B option
seems to be the obvious choice for you. However, the broker failed to
mention that the Class B version of the fund does carry a 12b-1 fee of 1% a year
(this fee is listed in the fund's prospectus).
The table below shows the results of choosing the Class A version of Fund X,
the Class B version, and Fund Z (a no-load, no12b-1 fee fund) with the following
assumptions: 1) Operation costs are ignored 2) You hold the fund for
at least 7 years 3) Each fund earns 10% a year (before fees).
The Results:
|
Fund Z
(no fees) |
|
Class A
Fund X |
Class B
Fund X |
|
Starting Value |
$5,000 |
|
$5,000 |
$5,000 |
| Year 1 |
5,500 |
|
5,335 |
5,445 |
| Year 2 |
6,050 |
|
5,869 |
5,930 |
| Year 3 |
6,655 |
|
6,455 |
6,457 |
| Year 4 |
7,321 |
|
7,101 |
7,032 |
| Year 5 |
8,053 |
|
7,811 |
7,658 |
| Year 6 |
8,858 |
|
8,592 |
8,339 |
| Year 7 |
9,744 |
|
9,451 |
9,082 |
After seven years, Fund Z (the fund that your broker never told you about
because there were no sales commissions to be earned) is worth $293 more than
the Class A version of Fund X and $662 more than the Class B version of Fund
X. Although Class B sounded better than Class A at first glance, it
clearly was not the better choice.
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