Actively managed mutual funds charge higher management fees than passive funds.Assume that the net return to an active fund (after fees)is 9.5% (0.79% per month)and the net return to a passive fund is 10.5% (0.875% per month).Consider an investor who invests $600 per month (end-of-month)over thirty years in the passive fund.What is the future value of her savings? Now consider an investor who invests on a monthly basis over thirty years in the active fund.If the active fund investor wants the same future value as the passive fund investor,then how much more must she invest per month?
A) $145.79
B) $150.62
C) $59.86
D) $152.33
E) $167.92

Question

Quizplus · Accepted Answer

Step 1 - Calculate the future value of the passively managed fund. 11ea7fdb_fc14_1058_a768_7f67438094f7_TB2902_11 = PMT × 11ea7fdb_fc14_1059_a768_1dfb8c62b124_TB2902_11 FV = 600 × 11ea7fdb_fc14_376a_a768_91d390cfdadc_TB2902_11 = $1,509,841
Using a financial calculator:
N = 360, I/Y = .875, PV = 0, PMT = -600, cpt FV = $1,509,841
Step 2 - Solve for the payment for an actively managed fund to find the difference.
PMT = 1,509,841 / 11ea7fdb_fc14_376b_a768_a7764522e544_TB2902_11 = $745.79
Using a financial calculator:
N = 360, I/Y = .79, PV = 0, FV = -1,509,841, cpt PMT = 745.79
745.79 - 600 = $145.79 additional investment required per month

Actively Managed Mutual Funds Charge Higher Management Fees Than Passive