In: Finance
A mutual fund has the following fees and expenses. Front load of 6%, back load of 1%, 12b-1 of 0.25% and annual expenses of 1.5%. The return on the portfolio assets is 12%. Another mutual fund has the following fees and expenses. Front load of 0%, back load of 0%, 12b-1 of 2% and annual expenses of 1.5%. The return on the portfolio assets is 12%.
a)If you invest $10,000 today in both funds, how much will you have at the end of 10 years in each fund?
b) At what point do the two funds give the same return?
Aswer-(a)
Mutual Fund-A | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | Year-7 | Year-8 | Year-9 | Year-10 |
Opening value | $10,000 | |||||||||
Front Load fee @6% [ $10000*6%] | $600 | |||||||||
Actual amount invested in fund or Opening value [$10000-$600](A) | $9,400 | $10,353 | $11,420 | $12,616 | $13,955 | $15,454 | $17,134 | $19,015 | $21,122 | $23,481 |
12b-1 expenses[ $10000* 0.25%](B) | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 | $25.00 |
Annual Expenses[$10000*1.5%](C) | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 |
Back load (E) |
$263 [$23481+$2818]*1% |
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Return on asset[Actual amt invested or Opening value+12%](D) | $1,128 | $1,242 | $1,370 | $1,514 | $1,675 | $1,855 | $2,056 | $2,282 | $2,535 | $2,818 |
Closing Value of the Fund(A+D-B-C-E) | $10,353 | $11,420 | $12,616 | $13,955 | $15,454 | $17,134 | $19,015 | $21,122 | $23,481 | $25,861 |
Yearly return [(Closing-Opening)/ opening] | 3.53% | 10.31% | 10.47% | 10.61% | 10.75% | 10.87% | 10.98% | 11.08% | 11.17% | 10.13% |
Accumulated Return[ (Closing-$10000)/$10000] | 3.53% | 14.20% | 26.16% | 39.55% | 54.54% | 71.34% | 90.15% | 111.22% | 134.81% | 158.61% |
Vaue of first Mutual fund at the end of year 10 = $25861
Mutual Fund-B | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | Year-7 | Year-8 | Year-9 | Year-10 |
Opening value | $10,000 | |||||||||
Front Load fee@0% | $0 | |||||||||
Actual amount invested in fund or Opening value [$10000-$0](A) | $10,000 | $10,850 | $11,802 | $12,868 | $14,062 | $15,400 | $16,898 | $18,576 | $20,455 | $22,559 |
12b-1 expenses[ Actual amount invested * 2%](B) | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 |
Annual Expenses[$10000*1.5%](C) | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 |
Back load (E) | $0 | |||||||||
Return on asset[Actual amt invested or Opening value+12%](D) | $1,200 | $1,302 | $1,416 | $1,544 | $1,687 | $1,848 | $2,028 | $2,229 | $2,455 | $2,707 |
Closing Value of the Fund(A+D-B-C-E) | $10,850 | $11,802 | $12,868 | $14,062 | $15,400 | $16,898 | $18,576 | $20,455 | $22,559 | $24,916 |
Yearly return [(Closing-Opening)/ opening] | 8.50% | 8.77% | 9.03% | 9.28% | 9.51% | 9.73% | 9.93% | 10.12% | 10.29% | 10.45% |
Accumulated Return[ (Closing-$10000)/$10000] | 8.50% | 18.02% | 28.68% | 40.62% | 54.00% | 68.98% | 85.76% | 104.55% | 125.59% | 149.16% |
Vaue of second Mutual fund at the end of year 10 = $24916.
Abswer-(b)
At year 5 the two funds will give almost same return