Question

An investor is considering investing into a mutual fund. Before taking his decision you advise him to not only take into account returns but also fees charged by the mutual fund.

a) For each of the following options, calculate the amount available after 20 years assuming that the investor reinvests all distributions. All funds considered generate a 10% annual return throughout the period and the amount invested annually is always $3000

Option 1: The fund charges no fees on entry or exit or on an annual basis.

Option 2: The fund charges a 5% load fee so that only $2850 is actually invested in the fund every year. (Assume that distributions are not subject to the load fee)

Option 3: The fund charges no load fee but a 12b-1 charge of 1 %.

Option 4: The only fee charged is a 5% exit fee.

b) What can you conclude about fees in mutual funds given that the investor invested the same amount every year for the same total period with mutual funds that yielded the same return annually.

Answer 1

a) For each of the following options, calculate the amount available after 20 years assuming that the investor reinvests all distributions. All funds considered generate a 10% annual return throughout the period and the amount invested annually is always $3000.

Ans : Option 1: The fund charges no fees on entry or exit or on an annual basis.

Analysis: As I advise him to not only take into account returns but also fees charged by the mutual fund. Basis on which in this Scenario the Fund Manager is not chaging the Fees and all funds Able to provide Return of 10%.

b) What can you conclude about fees in mutual funds given that the investor invested the same amount every year for the same total period with mutual funds that yielded the same return annually.

Ans: Fees and expenses vary from fund to fund and the amount you pay may depend on the fund’s investment strategy. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees from one fund to another can add up to substantial differences in your investment returns over time, as the graph below shows.

It is important to understand that mutual funds do not impose these fees and expenses arbitrarily. Rather, the fund’s board of directors is responsible for overseeing the fund’s operations and management. The fund’s directors, and its independent directors, in particular, function as “watchdogs” who are supposed to look out for the interests of the fund’s shareholders. One of the most significant responsibilities of a fund’s board of directors is to negotiate and review the advisory contract between the fund and the investment adviser to the fund, including fees and expense ratios.