Suppose an individual invests $20,000 in a load mutual fund for two years. The l
ID: 2653687 • Letter: S
Question
Suppose an individual invests $20,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.0 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 1.0 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 15 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual funds over the two-year investment period.
A. The individuals actual investment, after the load fee is deducted:
B. Annual operating expenses:
C. Value of investment at end of year 1:
D. The investors return on the mutual fund investment after 1 year:
E. Value of investment at end of year 2:
F. Thus the investors annual return on the mutual fund over a 2 year period:
Explanation / Answer
A. Initial investment in the fund = $20,000
Front-end load of 3.00% = $600
Total investable funds = $19,400
So, Actual Investment after the load fees deducted = $19,400
B.Calculation of Annual Operating Expenses:
Annual Operating Expenses: Investment Value at the End of Year 1 = 19,400 x 1.15 = $22,310
Average NAV = Opening Investment + Closing Investment / 2
Average NAV = 19,400 + 22,310 / 2 = $20,855
Operating Expenses for the 1st Year = 20,855 x 1% = $208.55
Net Investable Fund at the beginning of Year 2 = 20,646.45
Annual Operating Expenses: Investment Value at the End of Year 1 = 20,646.45 x 1.15 = $23,743.42
Average NAV = Opening Investment + Closing Investment / 2
Average NAV = 20,646.45 + 23,743.42 / 2 = $22,194.94
Operating Expenses for the 2nd Year = 22,194.94 x 1% = $221.95
Total Operating Expenses of the Two Years = 208.55 + 221.95 = $430.50
C. Value of Investment at end of Year 1 = $22,310
D. Return of Investors after Year 1: Value of Investment after Year 1 = 22,310
Return = 22,310 - 20,000 / 20,000 = 1.55%
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