Question

You are considering an investment in a mutual fund with a 4% load and an expense ratio
of 0.5%. You can invest instead in a bank CD paying 6% interest.

Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.5% per
year. What annual rate of return must the fund portfolio earn for you to be better off in
the fund than in the CD? Does your answer in this case depend on your time horizon?Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.5% per
year. What annual rate of return must the fund portfolio earn for you to be better off in
the fund than in the CD? Does your answer in this case depend on your time horizon?

Answer 1

Ans:

When fund has a front load of 4% and expense ratio of 0.5% per annum.

To earn a minimum of 6% per annum.

Minimum annual return from Mutual fund portfolio is require depend upon number of year of investment:

For 1 year: 4+0.5+6= 10.5%

For 2 Years: 4/2+ 0.5+6= 8.5%

For 3 Years: 4/3+0.5+6= 7.83%

For 4 Years : 4/4+0.5+6= 7.5%

and so on.....minimum return from mutual fund fortfolio will depend upon the given formula: (4/No. of years + 0.5% + 6%)

b.

In case 0.5% per year charge instead of front load:

Minimum annual return required for fund portfolio:

Expense ratio+ Minimum Bank Return + Annual charge:

0.5+6+0.5 = 7%