Suppose an individual invests $28,000 in a load mutual fund for two years. The l

Question

Suppose an individual invests $28,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.2 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.63 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 8 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.

Explanation / Answer

Individual has invested $28,000. Upfront commission is charged only once when the fund is invested in mutual fund. so the net amount which is invested in mutual fund is actual amount invested less upfront commission. Upfront commission is 3.2% of $28,000

Net amount invested = actual amount - up front commission

= 28000 - (28000 * 3.2%)

= 28000 - 896 = $ 27,104

Net amount invested kept in mutual fund for one year and earn 8% return at the end of year.

Valution of fund at the end of year + (27104 * 8%) = 27104 + 2168.32

= $29,272.32

For calculating the reinvested amount for year two, operating expenses of 0.63% would be deducted from valuation of fund at end of year one.

Reinvestment amount = 29272.32 - (29272.32 * 0.63%)

= 29272.32 - 184.42 = $29,087.90

At the end of year two fund again earned return of 8% and from valuation of fund 0.63% operating expenses will get deducted. so the calculation will be as follows

Valuation at the end of two year = 29087.90 + (29087.90 * 8%)

= 29087.90 + 2327.03 = $ 31414.93

Amount less operating expenses = 31414.93 - (31414.93 * 0.63%)

= 31414.93 - 197.91 = $ 31217.02

so value after two years is $ 31,217.02

Annual return on mutual funds over two year investment period

= [(Value after two years - Value at the beginning) / value at the beginning] * 100

=[(31217.02 - 28000)/28000] * 100 = 11.49%

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