Question

Suppose an individual invests $26,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.0 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.61 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 6 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual funds over the two-year investment period.

Answer 1

Investment = 26000

Up front commission = 3% * 26000 = 780

Net amount = 26000-780 = 25220

Value after 1 year @6% = 25220*1.06 = 26733.2

Annual fund operating = 0.61% *average inv value = 0.61% * (25220+26733.2)/2 = 158.46

Net VAlue = 26733.2-158.46 = 26574.24

Value at yr 2 @ 6% = 26574.24*1.06 = 28169.23

Annual operating expenses = 0.61%*(28169.23+26574.24)/2 = 166.97

Net value at yr 2 = 28169.23-166.97 = 28002.26

2 yr return = ((Net value at yr 2 - start value )/start value) = ((28002.26 - 26000)/26000) = 7.70%

Annual return = 1.077^0.5 = 3.78%