Question

3) Consider a no-load mutual fund with the net asset value (NAV) of $10 at the start of the year. At the end of the year, the mutual fund has $240 million in assets with 22 million shares and its total expense ratio is 1%. 1) What is the NAV at the end of the year? Please take into account the expense ratio.(20points) During the year investors have received income distributions of Si per share and capital gain distributions of 51.2 per share. What is the rate of return on the fund? (20points)

Answer 1

1) NAV = (Assets-Liabilities)/total outstanding shares

Expense ratio = 1%

= $240*1% = 2.4

Expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative,management,advertising and all other expense. An expense ratio of 1% indicates each year 1% of funds total assets will be used to cover expenses. So here in this case 2.4 (which is 1% of total assets) will be deducted for NAV calculation.

NAV at the end of the year = (240-2.4)/22

= 10.8

2) Rate of return =( NAV at end- NAV at start)+Income distributions+capital gain distributions)/ NAV at start

= (10.8-10)+1+1.2/10

= 0.3