Question

A mutual fund's net asset value is $39.30, but the fund charges a 3 percent load fee (front-loaded) and an exit fee of 1 percent (if redeemed in 6 motnhs) of net asset value. An individual client purchases 10 shares of the mutual fund on Jan 5 of year 20X1. During the year 20X1, the fund distributes $3.45 capitial gain and $0.75 dividend income. The asset value rises to $42.12 on Jan 5 of year 20X2 and the investor redeems the shares.(PLEASE SHOW WORK)

a) what is the percentage return the fund can report that was achieved by its portfolio managers?

b) What is the percentage return the individual earned on the investment? Why is this answer different from the answer is part (A)?

Answer 1

Mutual Fund return	(Closing NAP + Capital Gain distribution + dividend distribution-opening NAV)/Opening NAV
	(42.12 + 3.45 + 0.75-39.3)/ 39.3
	17.86%
For individual investor	Investment done for 10 units
initial Investment cost	=39.3*10
initial Investment cost	393
Front Loan @ 3%	11.79
Initial Investment done	404.79
Returns received	(42.12*10 + 3.45*10 + 0.75*10 - 404.79)/ 404.79
	14%
From	Return reported
Mutual Fund	17.86%
Investor	14.43%
There is difference as Investor will be taking into account the front load charged by Mutual Fund