Question

You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5% front load, a 1.75% management fee, and a 0.5% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets for simplicity. The gross annual return on the fund's shares was 12.50%. What was your net annual rate of return to the nearest basis point?

Answer 1

Investment amount = $15,000

Front load = 3.5%

Front Load cost = 3.5% of $15,000 = $525

Actual Amount to be invested = Investment amount – Front Load cost

                                               = $15000 - $525 = $14475

Gross annual return on the fund's shares = 12.50%

Amount received after 1 year = $14475 * (1+12.5%)

                                               = $16284.375

Management and 12b-1 fee = ($16284.375 - $14475) * 0.5%

                                             = $9.05

Therefore, amount left after all expenses = $16284.375 - $9.05

                                                                 = $16275.325

Thus, annual rate of return = 1 - (16275.325/15000)

                                           = 8.50%

The annual rate of return is 8.50%.