You are considering an investment in a mutual fund with a 3% load and an expense

Question

You are considering an investment in a mutual fund with a 3% load and an expense ratio of 0.75%. You can invest instead in a bank CD paying 5% interest.

If you plan to invest for two years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns.

If you plan to invest for six years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Assume annual compounding of returns.

Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 1.00% per year. What annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD?

You are considering an investment in a mutual fund with a 3% load and an expense ratio of 0.75%. You can invest instead in a bank CD paying 5% interest.

Explanation / Answer

Q.1

Q.1

Year 1 Front end load 3% Investment in mutual fund 97 Bank interest@5% 4.85 Total 101.85 Less:Expenses Ratio @0.75% 0.764 Valu of Mutual Fund after 1 year 101.086 Year 2 Fund Value 101.086 Add:Interest earnings @5% 5.054 Total 105.659 Less: Expenses @0.75% 0.792 Net Value after 2 year 104.867 Net Gain after 2 years 4.867 Annual return (4.866746/2) 2.433 Answer: 2.43% Q.b Interest Expenses Ending year Beginning at 5% total at 0.75% Emount 1 97.00 4.85 101.85 0.76 101.09 2 101.09 5.05 106.14 0.80 105.34 3 105.34 5.27 110.61 0.83 109.78 4 109.78 5.49 115.27 0.86 114.41 5 114.41 5.72 120.13 0.90 119.23 6 119.23 5.96 125.19 0.94 124.25 After 6 years total return = 124.25-100=24.25 Average Return = 24.25/6= 4.042% Q.c Interest Expenses Ending year Beginning at 5% total at 1.00% Emount 1 100 5 105 1.05 103.95 2 103.95 5.20 109.15 1.09 108.06 3 108.06 5.40 113.46 1.13 112.32 4 112.32 5.62 117.94 1.18 116.76 5 116.76 5.84 122.60 1.23 121.37 6 121.37 6.07 127.44 1.27 126.17 After 6 years total return = 126.17-100=26.17 Average Return = 26.17/6= 4.362%

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