In: Finance
ABC Domestic Equity Fund sells two types of share, A+ and B+. A+
shares are sold with front-end load fee of 5% whilst Type B+ shares
are not subject front-end load fee but are charged to investment
management fee of 1% per annum as well as exit (back-end load) fee
that start at 12% and reduce by 2% for each full year the investor
holds the portfolio (until the 6th year). The annual rate of return
for both types of share is 15%.
(a) Calculate the value of a Rs 25,000 investment made by investor
Mr Paul Halp in Type A+ shares if the shares are disposed after (i)
one year and (ii) 5 years.
(b) Calculate the value of a Rs 25,000 investment made by investor
Mrs Jacqueline Halp in Type B+ shares if the shares are disposed
after (i) one year and (ii) 5 years.
(c) As an analyst, which types of share will you recommend the
investor to buy?
a]
(i)
Value of investment = initial amount invested * (1 - front load) * (1 + rate of return)n
where n = number of years
Value of investment = 25,000 * (1 - 5%) * (1 + 15%)1
Value of investment = Rs 27,312.50
(ii)
Value of investment = initial amount invested * (1 - front load) * (1 + rate of return)n
where n = number of years
Value of investment = 25,000 * (1 - 5%) * (1 + 15%)5
Value of investment = Rs 47,769.73
b]
(i)
Value of investment = initial amount invested * (1 + net rate of return)n * (1 - back load)
where n = number of years
net rate of return = gross rate of return - investment management fee = 15% - 1% = 14%
Value of investment = 25,000 * (1 + 14%)1 * (1 - 12%)
Value of investment = Rs 25,080.00
(ii)
Value of investment = initial amount invested * (1 + net rate of return)n * (1 - back load)
where n = number of years
net rate of return = gross rate of return - investment management fee = 15% - 1% = 14%
The back load decreases by 2% each year. Hence, at the end of 5th year, back load = 4%.
Value of investment = 25,000 * (1 + 14%)5 * (1 - 4%)
Value of investment = Rs 46,209.95
c]
It is recommended to buy A+ type of shares because the value of investment is higher with A+ type in both cases, i.e. disposal after 1 year / 5 years.