11-Mutual Funds, Joint PDFs

11-Mutual Funds, Joint PDFs - MUTUAL FUNDS 4.2 4.4-4.7 F...

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MUTUAL FUNDS 4.2, 4.4-4.7
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Front-End Loads What they are for Used to pay brokers who sell funds How they affect price paid NAV of fund: $13 Front End Load: 4% What price do you pay per share? P = 13 + .04(P) P = 13/.96 = 13.54 Fund NAV must increase to 13.54 (4.2%) just to break even, assuming no other fees.
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Front End Loads Another way of looking at how they affect price: Assume front-end = 4% If you invest $1000, only $960 is actually invested The other $40 is gone in fees Your investment must increase to 1000 (4.2%) just to break even, assuming no other fees
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Front End Loads How they affect returns Fund: NAV=$10 Front End load of 5% NAV grows by 14% per share each year Assume you invest $X and hold investment for two years. % 96 . 29 1 ) 14 . 1 ( : fee no with % 5 . 23 1 ) 14 . 1 ( ) 05 . 0 1 ( return 2 2 = - = - - = X X
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Back End Loads What they are for Used to pay brokers who sell funds 0 to 6% Usually reduced 1% point for each year you hold the fund How they affect price paid They don’t Assuming no other fees, price is NAV
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Back End Loads How they affect payoff NAV of fund: $13 Back End Load: 5% What price do you get when you sell the fund? 13*.95 = $12.35
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Back End Loads How they affect returns Fund: NAV=$10 Back End load of 5% Fund earns 14% per share each year Assume you invest $X and hold investment for two years. % 96 . 29 1 ) 14 . 1 ( return : fee no with % 5 . 23 1 ) 05 . 1 ( ) 14 . 1 ( return 2 2 = - = = - - = X X
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Annual Expenses Operating expenses What They are for Used to pay for administrative expenses and advisory fees 12b-1 charges What they are for Used to pay for advertising, promotional literature, and brokers
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Annual Expenses How they affect returns Fund: NAV=$10 Annual expenses (expense ratio) of 1% Fund earns 14% per share each year Assume you invest $X and hold investment for two years Each year gross return net of fees is 1.14 - 0.01 = 1.13 96 . 29 1 ) 14 1 ( return : fee no with % 69 . 27 1 13 . 1 return 2 2 = - = = - = . X X
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Summary Assume: A fund NAV grows by r each year. The fund has front-end load of f . The fund has back-end load of b . The fund has annual expense ratio of a . No capital gains or distributions The gross return for an investor in the fund over n periods is ) 1 ( 1 1 Return Gross b r-a) -f)( ( n - + =
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Example: Fund or CD’s? Investment Choices:
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11-Mutual Funds, Joint PDFs - MUTUAL FUNDS 4.2 4.4-4.7 F...

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