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.

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.

Explanation / Answer

Amount invested is $40,000

After charging upfront fee, net amount invested is = 40000 - 40000 * 4.4% = 40000 - 1760 = 38240

Returns in Year 1 are 8%, so value at the end of the year = 38240 * ( 1 + 8%) = 41299.20

Fund operating expenses for Year 1 = 0.75% on average amount in Year 1

= ((41299.2 + 38240 ) / 2) * 0.75% = 298.27

Net amount invested in Year 2 = 41299.20 - 298.27 = 41000.93

Returns in Year 2 are 8%, so value at the end of the year = 41000.93 * ( 1 + 8%) = 44281.00

Fund operating expenses for Year 2 = 0.75% on average amount in Year 2

= ((44281.00 + 41000.93) / 2) * 0.75% = 319.81

Net amount at the end of Year 2 = 44281.00 - 319.81 = 43961.20

Total Return on the investment = (43961.20 - 40000 ) / 40000 = 9.9%

Calculate annualized return using the formula as follows

= (1+0.099)(1/2)-1 = 1.0990.5-1 = 4.83%

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