Question

Suppose an individual invests $30,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.65 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 6 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual funds over the two-year investment period.

Answer 1

		A	B	C=A*1.06	D=(A+C)/2	E=C-D
				Year end
		Beginning	Load	Net Asset	Annual	Ending
	Year	Balance	fee	Value(NAV)	Expense	Balance
	0		$ 1,020.00			$ 28,980.00	(30000-1020)
	1	$ 28,980.00		$ 30,718.80	$         194.02	$ 30,524.78
	2	$ 30,524.78		$ 32,356.27	$         204.36	$ 32,151.90
	Load fee	$    1,020.00	(0.034*30000)
	NAV year1end	$ 30,718.80	(1.06*28980)
	Annual expense year1	$        194.02	((28980+30718)/2)*0.0065
	End of year 2 NAV	$ 32,356.27	(30524.78*1.06)
	Annual expense year2	$        204.36	((30524.78+32356.27)/2)*0.0065
	Investment	$30,000
	Value after 2 years	$ 32,151.90
	Annual Return =R
	30000*((1+R)^2)=	$ 32,151.90
	(1+R)^2=(32151.90/30000)	1.0717
	1+R=(1.0717^(1/2)=	1.035243969
	R=	0.035243969
	Annual Return	3.52%