CALCULATEInvestmentFees6.docx - NGPF Activity Bank...

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NGPF Activity Bank Investing #6 CALCULATE: Investment Fees Suppose Adrian and Clemens both invest $10,000 in an actively managed mutual fund and a passively managed index fund linked to the S&P 500, respectively. Suppose Adrian’s broker manages to create a mutual fund that matches the S&P, so both men are earning the same rate of return -- 7% in 2014. Adrian’s broker charges 1.3%, while Clemens’s charges 0.2%; both are charged based on the size of the original investment. 1. How much does each investor make on his investment with the 7% rate of return? 2. How much does Adrian owe his broker for the mutual fund? 3. How much does Clemens owe his broker for the index fund? 4. At the end of the year, what’s the total value (AFTER FEES) of Adrian’s stock? 5. What’s the total value (AFTER FEES) of Clemens’s stock? 6. How much more value does Clemens’s investment generate than Adrian’s in one year’s time? View all NGPF's lessons on Gooru 1
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Let’s think of it another way so that we can see the impact of compounding on this investment. For simplicity’s sake,
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Unformatted text preview: we’ll assume that Adrian’s rate of return is effectively 5.7% annually (7% - 1.3% fee) and Clemens’s rate is effectively 6.8% annually (7% - 0.2% fee). Use the compound interest calculator to answer these questions. You can round to the nearest whole dollar. 7. How much will Adrian have if he allows his investment to remain in the mutual fund for 10 years? 8. How much will Clemens have if he allows his investment to remain in the index fund for 10 years? 9. How much more value does Clemens’s investment generate than Adrian’s in 10 year’s time? 10. What about over 20 year’s time? In summary… 11. What’s the effect of choosing an actively managed fund over a passively managed one? 12. Give possible reasons, despite what you’ve seen in the exercise above, why some investors still opt for an actively managed fund. View all NGPF's lessons on Gooru 2 View all NGPF's lessons on Gooru 3...
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