Question

A year ago, an investor bought 1,000 shares of a mutual fund at the net asset value of $25 per share. The fund distributed dividends of $2.5 and capital gains of $2. Today, the NAV is $28.

a. What’s the holding period return?

b. Assuming all dividends and capital gain distributions are reinvested into additional shares of the fund at an average price of $26 per share. What’s holding period return?

Answer 1

a. Holding Period Return = [(Dividend distribution + Capital gain distribution + Change in NAV) / Beginning NAV] * 100

Dividend distribution = $2.5

Capital gain distribution = $2

Change in NAV = Ending NAV - Beginning NAV

Ending NAV = $28

Beginning NAV = $25

Change in NAV = $28 - $25

= $3

Holding Period Return = [($2.5 + $2 + $3) / $25] * 100

= ($7.5 / $25) * 100

= 30%

b. Initial Investment = No of shares * Beginning NAV

= 1,000 * $25

= $25,000

Total dividend distribution and Capital gain distribution = ($2.5 + $2) * 1,000 shares

= $4.5 * 1000

= $4,500

The above amount was reinvested into additional shares at $26 per share

The additional shares received = $4,500 / $26

= 173.08 units

Therefore total number of shares after reinvestment = 1000 + 173.08

= 1,173.08 shares

Ending value of the shares = 1,173.08 * $28

= $32,846.24

Note - $28 is the ending NAV

Holding period return = [(Ending value of shares - Initial investment in shares) / Initial investment in shares] * 100

= [($32,846.24 - $25,000) / $25,000] * 100

= ($7,846.24 / $25,000) * 100

= 31.38%