Question

Consider a mutual fund with a 5% front load and with $500 million in assets at the start of the year, and 12 million shares outstanding. If the gross return on assets is 14% and the total expense ratio is 0.6% which will be charged at the end of the year based on the end of year value, what is the estimated rate of return on the fund for the first year

Answer 1

front load reduce the amount invested. so actual amount invested will be less than gross investment amount.

actual amount invested = gross investment*(1-front load) = $500 million*(1-0.05) = $500 million*0.95 = $475 million

net return on investment = actual amount invested*(gross return - total expense ratio) = $475 million*(0.14 - 0.006) = $475 million*0.134 = $63.65 million

estimated rate of return = net return on investment/gross investment amount = $63.65 million/$500 million = 0.1273 or 12.73%