Question

5. Two years ago, you bought 1,000 units of a new mutual fund at a price of $10 each. To start, the fund raised a total of $100 million; it has an MER of 2.5%. In the first year, the fund manager made $12 million in gross investment income for the fund. At the start of year 2, investors bought another 1 million units and the current NAV. During the second year, the portfolio manager made a total of $14 million in gross investing profits. How much can you sell your units for (approximately) at the end of year 2? (Make sure to show your calculations and explain them so that the reader understands them).

Answer 1

Management Expense Ratio=(Total Expenses)/(Average Value of Portfolio)=2.5%

Total Number of units at the beginning =$100million/$10=10 million units

NAV=$10

Average Value of portfolio in year1=($100 million+$12million)/2=$106million

Total expenses=$106million*2.5%=$2.65million

Fund Value at the end of Year1=$100 million+$12million-$2.65million=$109.35million

NAV at the end of Year1=109.35/10=$10.935

Number of Units purchased at start of year2=1million

Amount invested at current NAV=$10.935million

Total amount in fund at start of Year2=$109.35million+$10.935million=$120.285million

Total Units =10million+1million=11million

Average Portfolio Value in Year2=120.285+(14/2)=$127.285million

Total expenses=$127.285million*2.5%=$3.182125 million

Fund Value at the end of Year2=$120.285 million+$14million-$3.182125million=$131.102875million

NAV at the end of Year2=$131.102875/11=$11.9184432

Value of investment at end of year 2=1000units*$11.9184432=$11,918.44

You can sell your units for (approximately) at the end of year 2=$11,918.44