Question

An investor is considering investing into a mutual fund. For a) and b), alculate the amount available after 20 years assuming that the investor reinvests all distributions. All funds considered generate a 10% annual return throughout the period and the amount invested annually is always $3000.

a) The first fund charges no fees on entry or exit or on an annual basis.

b) The second fund charges a 5% load fee so that only $2850 is actually invested in the fund every year

Answer 1

Future Value of Mutual Funds A & B

Mutual Fund A

Number of Years (t) = 20 Years

Interest Rate ( r) = 10%

Annual Investments = 3000

Formula

FV factor = {(1+r)t – 1 } / r

=(1.1^20-1)/0.1

= 57.275

= 57.275*3000

= 171825 $

Mutual Fund B

Number of Years (t) = 20 Years

Interest Rate ( r) = 10%

Annual Investments = 2850 (After consider entry load)

Formula

FV factor = {(1+r)t – 1 } / r

=(1.1^20-1)/0.1

= 57.275

= 57.275*2850

= 163234 $

It is better to invest in Mutual fund A since it provides higher return than Mutual fund B.

Hope it may helps you and feel free to ask any doubts...