Question

You purchased shares of a mutual fund at an offering price of $95 per share at the beginning of the year and paid a front–end load of 3.50%. If the securities in which the fund invested increased in value by 12.25% during the year, and the fund’s expense ratio was 1.25%, what is your rate of return if you sold the fund at the end of the year?

Answer 1

Sol:

Purchased price = $95

Front end load = 3.50%

Increase in investment value = 12.25%

Fund expense ratio = 1.25%

Total investment = Purchased price x ( 1 + Front end load)

Total investment = 95 x (1 + 3.50%)

Total investment = 95 x 1.0350 = $98.325

Fund selling price = Purchased price x (1 + Increase in investment value)

Fund selling price = 95 x (1 + 12.25%)

Fund selling price = 95 x 1.1225 = $106.6375

Fund expense = Fund selling price x Fund expense ratio

Fund expense = 106.6375 x 1.25% = $1.3330

Net amount received = Fund selling price - Fund expense

Net amount received = 106.6375 - 1.3330 = $105.30

Rate of return = ( Net amount received - Total investment) / Total investment

Rate of return = ( 105.30 - 98.325) / 98.325

Rate of return = 6.9795 / 98.325 = 0.0710 or 7.10%

Therefore your rate of return if you sold the fund at the end of the year will be 7.10%