Suppose an individual invests $40,000 in a load mutual fund for two years. The l

Question

Suppose an individual invests $40,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.75 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.(e.g., 32.16))

Suppose an individual invests $40,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.75 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.(e.g., 32.16))

Explanation / Answer

Calculation of Annual Return withut Discounting (No NPV)

Load Fee (Anjualized) =4.4/2 Years =2.20%

add: Annual Fund Operating Expenses = 0.75%

= 2.95%

So Net annual Return = 8%- 2.95% = 5.05%

Calculation of Annual Return Based on Present Value of Investment

Initial Investment = $40000

less: Front End Load 4.4% = 1760

Total Investable Fund = $38240

Invetment value after year * 1.08 = $41299.2

Operating Expenses based on Average NAV= 39120 x 0.0075 = $293.4

=$41005.8

Investment value after year two = 41005.8 x 1.08 = $44286.26400

Operating Expenses based on Average NAV= 42646.032 x 0.0075 = $319.84524

   = $43966.41876

Average Annual Compounded Return =

$43966.41876 = $40000(1+g)^2

so g = (sqrt (43966.41876/40000)) - 1 = .0484085 or 4.84%

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