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Loaded up fund
12b-1 fee
Expense ratio
Front end load
Economy fund
12b-1 fee
Expense ratio
Front end load
Rate of return
$$ Invested 100.00$
Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an
expense ratio of .75%. Economy Fund charges a front-end load of 2%,
but has no 12b-1 fee and an expense ratio of .25%. Assume the rate
of return on both funds’ portfolios (before any fees) is 6% per year.
How much will an investment in each fund grow to after:
a. 1 year?
b. 3 years?
c. 10 years?
Start assets million
Start shares million
Dividend million
Price increase
12b-1 fees
Solution
Consider a mutual fund with $200 million in assets at the start of the
year and with 10 million shares outstanding. The fund invests in a
portfolio of stocks that provides dividend income at the end of the year
of $2 million. The stocks included in the fund’s portfolio increase in
price by 8%, but no securities are sold, and there are no capital gains
distributions. The fund charges 12b-1 fees of 1%, which are deducted
from portfolio assets at year-end. What is net asset value at the start
and end of the year? What is the
rate of return for an investor in the fund?
Class A front end load
Class B 12b-1 fees
Class B back end load
Yr 0
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Rate of return
$$ Invested 1,000.00$
Solution
Proceeds from sale in year 4
Class A shares 1,000.00$
The Investments Fund sells Class A shares with a front-end load of
6% and Class B shares with 12b-1 fees of .5% annually as well as
back-end load fees that start at 5% and fall by 1% for each full year
the investor holds the portfolio (until the fifth year). Assume the
portfolio rate of return net of operating expenses is 10% annually. If
you plan to sell the fund after four years, are Class A or Class B
shares the better choice for you? What if you plan to sell after 15
years?
Tax free municipal bond fund
Expected rate of return
Management fees
Equity fund
Expected rate of return
Management fees
Solution
Tax free fund fees #DIV/0!
You expect a tax-free municipal bond portfolio to provide a rate
of return of 4%. Management fees of the fund are .6%. What
fraction of portfolio income is given up to fees? If the
management fees for an equity fund also are .6%, but you expect
a portfolio return of 12%, what fraction of portfolio income is
given up to fees? Why might management fees be a bigger factor
in your investment decision for bond funds than for stock funds?
Can your conclusion help explain why unmanaged unit
investment trusts tend to focus
on the fixed-income market?
