You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5% front load, a 1.75% management fee, and a 0.5% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets for simplicity. The gross annual return on the fund's shares was 12.50%. What was your net annual rate of return to the nearest basis point?

Question

Quizplus · Accepted Answer

With a 3.5% front load, the initial investment would be reduced to $14,475. Then, the management fee and 12b-1 fee would further reduce the investment by 2.25% ($326.44) each year. Using the formula [(Ending Value - Beginning Value) / Beginning Value] to calculate the net annual rate of return, we get: [$15,000 * (1 - 0.035) * 1.125 - $326.44 - $326.44]/$14,475 - 1 = 0.0612 or 6.12%. Therefore, the best choice is option B, which is the calculated net annual rate of return.

You Have $15,000 to Invest in a Mutual Fund