Sam has just received a bonus of $6,000 from work which he plans to invest into

Question

Sam has just received a bonus of $6,000 from work which he plans to invest into an IRA. After a lot of research, Jimmy has narrowed his selection to two mutual funds. The first fund requires a 5% up-front commission followed by a 0.25% annual management fee. The second fund has no up-front fee; instead its management fees are 2.00% in year one, 0.42% in years two and three, and 1.35% each year thereafter. He intends to keep this money in the mutual fund for 10 years and is estimating a 5% annual return.

Formulate a spreadsheet to determine which mutual fund Sam should select.

Explanation / Answer

up front commission i scommision paid by investor for investing in mutual fund, onits investment.

management fee is fees paid by mutual fund to fund manager irrespective of fund performnce,on the total value of fund.

hence we should choose from these two fund which has less management cost

other than above there is up front fee in MF1 which is 5% on his investment.

still after considering that,choose fund 1 which has less management cost .

management fee - 1 0.25 2 2 0.25 0.42 3 0.25 0.42 4 0.25 1.35 5 0.25 1.35 6 0.25 1.35 7 0.25 1.35 8 0.25 1.35 9 0.25 1.35 10 0.25 1.35 total 2.5 12.29

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