Question

Suppose an individual invests $50,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 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 0.90 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 5 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 fund over the two- year investment period. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) Annual return

Answer 1

Net Asset Value = Amount Invested * ( 1- upfront entry load)

= $50,000 * ( 1-0.02)

$49,000

The fee of 0.90% on Invested amount ie.  49000 * 0.9% = $441 shall be charged at the end of year

At the end of the 1st year , the invested amount grows to = 49000 *1.05 = $51450

After deducting 0.9% fee of $ 441 , the net amount paid to investor is $51450 - $441 = $51009

Now, as this amount is reinvested,

At the end of the 2nd year , the invested amount grows to = 51009 *1.05 = $53559.45

And the 0.9% fee for 2nd year = 51009 * 0.90% = 459.08

After deducting 0.9% fee of $ 459.08 , the net amount paid to investor is $53559.45 - $459.08 = $53100.37

So, the annual return of MF over the 2 year period = (Final value/Initial value) ^(1/2) - 1

=(53100.37/50000)^1/2 - 1

=1.0305 - 1

= 0.0305 = 3.05% p.a.