Question

1) 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 (8 marks) 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. (3 marks) (50 words)

Fig: 1

Fig: 2

Fig: 3

Fig: 4

Fig: 5

Fig: 6

Fig: 7