Question

You pay $21,600 to a mutual fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year and the fund's expense ratio is 1.3% during the year (deducted periodically from the fund). What is your rate of return on the fund if you sell your shares at the end of the year

Answer 1

Answer:

4.23%

Explanation:

For computing the rate of return on the fund, we need to do following calculations

1. The fund after deducting the front-end load is

= $21,600 - $21,600 × 4%

= $21,600 - $864

= $20,736

2. Now number of bought is

= $20,736 ÷ $18 per share

= $1,152

3. The closed NAV is

= $18 + $18 × 10%

= $18 + $.8

= $19.8

4. So, the end year asset value is

= Closed NAV × number of shares bought

= $19.8 × 1,152

= $22,809.60

5. Now the year end investment value after considering the expense ratio is

= $22,809.60 × (1 - 1.3%)

= $22,513.0752

6. Now the rate of the return is

= ($22,513.0752 - $21,600) ÷ ($21,600)

= 4.23%