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?
Class B shares 1,000.00$
Proceeds from sale in year 15
Class A shares 1,000.00$
Class B shares 1,000.00$
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?