Question

ABC Domestic Equity Fund sells two types of share, A+ and B+. A+ shares are sold with front-end load fee of 5% whilst Type B+ shares are not subject front-end load fee but are charged to investment management fee of 1% per annum as well as exit (back-end load) fee that start at 12% and reduce by 2% for each full year the investor holds the portfolio (until the 6th year). The annual rate of return for both types of share is 15%.

(a) Calculate the value of a Rs 25,000 investment made by investor Mr Paul Halp in Type A+ shares if the shares are disposed after (i) one year and (ii) 5 years.

(b) Calculate the value of a Rs 25,000 investment made by investor Mrs Jacqueline Halp in Type B+ shares if the shares are disposed after (i) one year and (ii) 5 years.

(c) As an analyst, which types of share will you recommend the investor to buy?

Answer 1

a). Amount invested in Type A+ shares = investment*(1-front-end load fee)

= 25,000*(1-5%) = 23,750

i). Investment value after 1 year = amount invested*(1+15%)^1 = 23,750*(1+15%) = 27,312.50

ii). Investment value after 5 years = amount invested*(1+15%)^5 = 23,750*(1+15%)^5 = 47,769.73

b). Amount invested in Type B+ shares = 25,000

i). Investment value after 1 year = 25,000*(1+15%) = 28,750

Net value = invesment value*(1 - exit fee - management fee) = 28,750*(1-12%-1%) = 25,012.50

ii). If investment is made for 5 years then net value after 5 years = 45,906.74

c). Type A+ shares should be invested as they give a higher return than Type B+ shares.