Consider a mutual fund with $207 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 $4 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 1.00%, which are deducted from portfolio assets at year-end.
a. What is net asset value at the start and end of the year?
b. What is the rate of return for an investor in the fund?
Net asset value at the start of the year = 207 million / 10 million = 20.7 per share.
To calculate net asset value at the end of the year we have to calculate value of portfolio asset at the end of the year. It is given that the value of stocks in fund’s portfolio increased by 8 % and also fund have received dividend of 4 millions. Therefore the value of portfolio asset at the end of the year = (207*1.08)+4 = 227.56 millions.
Therefore net asset value at the end of the year = 227.56/10 = 22.756 per share
To calculate rate of return for an investor we can use the following formula – (NAV at the end of year – NAV at the start of the year) / NAV at the start of the year
=(22.756 – 20.7)/ 20.7
= 9.93 %