Question

Part One: Explain the differences between open-ended, closed-ended, unit investment, and hedge funds.

Part Two: Calculate Net Asset Value: Fund ABC has $12,500,000 worth of securities and $3,000,000 in cash and $500,000 in liabilities. If the fund has 1,000,500 shares outstanding what is the NAV: NAV = ___________________ Calculate the net rate of return: An investor purchases a mutual fund share for $100. The fund pays dividends of $4, distributes a capital gain of $5, and charges a fee of $3 when the fund is sold one year later for $114. What is the net rate of return from this investment? Rate of return = ____________

Answer 1

Part 1 : Open ended funds are those which continuously buys and sells unit of the funds . The number of units outstanding may change time to time as and when fund buys or sells units. Closed endend funds are those which do not buy or sell it's units in other words number of utstanding units remains sames at all times. Both funds invest in different shares to reduce the risk

UTI offers units with interest payments meaning there buy buyer of UTI gets periodic interest and can redem their units with the investment company

Hedge funds : Unlike Open ended and closes ended funds, hedge funds uses derivatives to generate higher return. Hedge funds is managed actively while other funds may follow specific indice.

Part 2 : Net asset value = Total securities + cash - liabilities / No of shares outstanding

=12,500,000 + 3,000,000 - 500,000 / 1000500

=15,000,000/1000500

=14.99 $

Part 3 : Rate of return = Dividend + Distribution of capital gain + capital appreciation - Fee charged / Purchase price

= 4 + 5 + (selling price - Purchase price) - 3 /100

=6 + (114-100) /100

=6+14 /100

=20/100

=0.2

=i.e 20%