Question

2. Fund A charges a 2.5% front-end load and maintains an expense ratio of 75%. Fund B charges a front-end loan of 3% and an expense ratio of 30%. Assume the rate of return is 12% per year for both the funds. You have $25,000 to invest and you want $72,000 in 10 years for a down payment towards your dream home. Which of these two funds would you invest your money in and why? (1 pts)

Answer 1

net amount after n years =initial investment*(1-front end load)*(1+return-expense ratio)^n

Fund A;

net amount after 10 year= 25000*(1-.025)*(1+.12-.0075)^10 =70785.584

Fund B:

net amount after 10 year =25000*(1-.03)*(1+.12-.003)^10 =73323.55

-----Since Fund B produce higher amount than 72000 after 10 years it is preferred.