Question

You invested $1,000 in a mutual fund with a 6% front-end load and an expense ratio of 1%. Expenses are paid at the end of each year. The fund produced an annual return of 4% before fees.

What will be the value of your investment after 7 years?

Answer #1

Mutual funds with front-end load reduce the investment amount by the front-end load. so, actual amount invested by the fund is lower than the amount invested by the investor.

Actual amount invested by the fund = gross investment amount*(1-front-end load) = $1,000*(1-0.06) = $1,000*0.94 = $940

Net return generated by the fund = annual return before fees - expense ratio = 4% - 1% = 3%

value of investment after 7 years = Actual amount invested by
the fund*(1+Net return generated by the fund)^{no. of
years}

value of investment after 7 years = $940*(1+0.03)^{7} =
$940*1.03^{7} = $940*1.22987386542487 = $1,156.08

the value of your investment after 7 years will be $1,156.08.

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