Question

A mutual fund currently manages $500 Million in assets and has issued 10 million shares. You invest $100,000 into the fund.

Suppose that over the next three years, the fund’s investments without considering fees return 10%, -10%, and 20%. In addition, the fund takes 1% at the start of each year for its management fee. What will have been your annualized return as an investor, and what will be the NAV at the end of the period?

Answer 1

Firstly, we should know about the NAV.

NAV is the net asset value of a mutual fund scheme. NAV is just like share price. NAV changes daily based on stock market as it depends upon the stock market, particular sector and companies in which money has been invested by mutual fund. NAV is the price on which mutual fund trades (bought and sold) in the market.

NAV = Total Assets - Liabilities (If any) / Number of shares

NAV = 500 Million / 10 Million

NAV = $50

Units held = Invested capital / NAV

Units held: 100000 / 50 = 2000 units of mutual fund

Average return = (10% -10% + 20%) / 3

Average return = 6.67%

Whatever the return, mutual fund will provide less management fees will be our annualized net return.