Question

Consider a no-load mutual fund with $250 million in assets and 17 million shares at the start of the year, and $430 million in assets and 18 million shares at the end of the year. Investors have received income distributions of $8 per share, and capital gains distributions of $0.50 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

a. 62.50%

b. 118.62%

c. 3.02%

d. There is not sufficient information to answer this question

Answer 1

Rate of Return on the fund

Net Asset Value at the beginning (NAV₀)

Net Asset Value at the beginning (NAV₀) = Total assets at the beginning / Number of shares outstanding

= $250 Million / 17 Million shares

= $14.7059 per share

Net Asset Value at the end (NAV₁)

Net Asset Value at the end (NAV1) = [Total assets at the end x (1 – Expense Ratio)] / Number of shares outstanding

= [$430 Million x (1 – 0.01)] / 18 Million shares

= $425.70 Million / 18 Million Shares

= $23.60 per share

Dividend Distribution = $8.00 per share

Capital Gain distribution = $0.50 per share

Therefore, the Rate of return = [{(NAV₁ – NAV₀) + Dividend & Capital Gain} / NAV₀] x 100

= [{($23.65 - $14.7059) + $8.00 + $0.50} / $14.7059] x 100

= [($8.9441 + $8.00 + $0.50) / $14.7059] x 100

= [$17.4441 / $14.7059] x 100

= 118.62%

“Hence, the Rate of return on the fund would be (b). 118.62%”