Mutual Funds and Other Investment Companies aeoun ‘An investment company is a financial service organization that sells units/shares in itself to the investors and uses the funds in portfolios of sccurities. Thus, an investment company especially mutual funds is an alternative for an investor sccking to own stocks and bonds. Rather than purchase securities and manage portfolio, investors can indirectly invest through investment company. This chapter deals with various types of investment companies, net assets values, types of mutual funds, cost of investing in mutual funds. Finally, it highlights the development of mutual funds in Nepal. completion of this chapter, students should be able to: «Understand the concept and types of investment company. + Caleulate net asset value. «+ Deserbe tho organization and functioning of mutual funds, «Distinguish between open- and closed-end funds. + Identify important considerations in investing in mutual funds. + Discuss various types of fund loads, fees, and charges. «Explain investors’ services offered by mutual funds. + Measure performance of mutual funds. + Understand the features of exchange-traded funds, ‘+ Highlight the growth of different types of mutual funds in Nepal. isecuited wre pee oe of portfolio is changed only under exceptional circumstances. price of shares oven soe eanies may be more or less than net assets value (NAV) per share. Net : eee Fa 7 ee by dividing net assets (lotal market value of securitics - ies) Of shares outstanding. Open-end investment companies stand ready at all to purchase its own share and issue new i ‘i shares to wwe f sellin, satya fund’ sharedirect marketing and we of aes een ‘There are two methods of selling Various types of mutual funds are established to altract different types of investors. Mutual funds aiffer greatly in: oer Stated investment objectives and portfolio strategies they have designed to achieve there objectives. Investing in right mutual funds is not an easy task. An investor must obtain sufficient information in order to make informed investment decision about mutual funds. Investors examine and analyze the information before choosing the right mutual funds. {,_ favestors should consider investment objective, services offered by the mutual funds, fees and charges and mutual funds performance while investing in mutual funds. ’ [illustrative Problems a OOOOn-.---—-- >? OOS... oo ‘ustration 4.1 Sahara mutual funds has 5,000,000 shares outstanding, and ils assets consist of sare common stock with an aggregate market value of Rs 80,000,000 and liabilities of Rs 5,000,000 as of Ashad 31. What is the NAV per share of the fund? Solution: Given: Number of shares outstanding = 5,000,000 Market value of stock (assets) = Rs 80,000,000 Liabilities = Rs 5,000,000 Net asset value per share (NAV) =? We have, Neste) Rs 80,000,000-Rs 5,000,000 * 5,000,000 Hence, net asset value of Sahara mutual funds is Rs 15 per share. = Rs 15 per share Itustration 4.2 The Lumbini Fund has sold 1,500,000 shares (units) to investors. Currently, the fund Natasa has accrued investment management fee obligations of Rs 500,000. The fund's portfolio is shown below. Calculate the fund's net asset value. Price per share Rs 100 70 300 1,000 Solution: Given: Number of shares sold = 150,000 shares Management fee obligations = Rs 50,000 ation of total market value of shares Shares 50,000158 INVESTMENT ANALYSIS Total Assets Total Assets-Liabilities NAV = Number of shares sold Rs 26,900,000 - Rs 500,000 Rs 26,900,000 = Rs 500,000 517 66 por si = F500,000 shares ~ 817-60 per share Hence, the net asset value of Lumbini Fund is Rs 17.60 per share. The X Fund; a closed-end investment company, has a portfolio of assets won Roz Mlustration 4.3 pan Natassotvdve anda million. It has liabilities of Rs 2 million. It also has 40 million shares outstanding ' a, Whatis the fund's NAV? b. If the fund trades at 8 percent discount from its NAV, what is the market pig the fund's shares? Solution: Given: Total assets = Rs 500 million Liabilities = Rs 2 million Number of shares outstanding = 40 million a. Wehave, NAV = Number of shares outstanding Rs 500 million - Rs 2 million 40 million = Rs 12.45 per share 'b. Market price of the fund’s share We have, Market price = NAV x (1 - Discount rate) = Rs 12.45 (1 - 0.08) = Rs 11.45 per share ‘Thus, net asset value and market price of X Fund are Rs 12.45 per share and Rs 11.45 per share respectively. ilustration 4.4 ‘An open-end fund has a net asset value of Rs 12 per share. [tis sold with a frontend te pre oad of 6 percent. What is the offering price? Solution: Given: Net assets value (NAV) = Rs 12 Front-end load = 6 percent Offering price We have, NAV Offering price = Frontend load _-Rs12 = 0.06 Therefore, offering price is Rs 12.77 per share. = Rs 12.77 per sharefo MUTUAL FUNDS AND OTH Suppose a mutual fund: “45 s has the followit cation scion Stocks neuen assets and liabilities: ee Bonds s Rs 200,000 g ‘Accounts payable , Rs 200,000 ‘There are 1,000 shares outstanding a, Whatis the NAV? "e b. Suppose the firm Suprse he frm sls anther 100 shares thas a3 percent fn What is the Given: tion! $0 Total Assels = Stocks + Bonds = Rs 500,000 + Rs 200,000 = Rs 700,000 Liabilities = Rs 200,000 Number of shares outstanding = 1,000 Total assets - Total liabilities a. Net Asset Value (NA\ = (navy Number of shares outstanding, b. Selling Price Nee T= Toad fee in fraction Rs 500 103 ‘hus, net asset value and selling price are Rs 500 and Rs 515.46 respectively. ee TE RT ‘At the beginning of the year, the Saturn Fund's NAV was Rs 78.50. At the end of the fund paid out Rs 1.25 in income and yesh year its NAV was R51650. At year-end, th Capital gains. What was the return on investment in the Savurn Fund during the year? Giver Boginning net asset value (NAVs) = Rs 18.50 Ending net asset value (NAV) = Rs 16.90 Income and capital gain = Rs 1.25 Holding period return (HPR) =? Wehave, _(NAVe-NAV.s)+0Gi+ Dive eRe NAV (Rs 16.90 Rs 18.50) +R5125 _ 9919 or -19% =. Rs 18.50 stent in Saturn Fund is -1.9 percent, = Rs 515.46 Solution: ‘Therefore, return on inv Conair the Following data onan open-end mutual funds: Diatibutfon at end of year in Rs) NAV an Jansary? Dividends Capital gains Rio 075 3 Rs15 0.60 1 Iustation 4.7 opera ren Rs 12 APR for 2014. HPR for 2015. ‘a, Calculate the I b. Calculate the I Solution: We have, AV) + CGi+ Div NAV. HPR= NAVIMlustration Hotdog pero ret Solution: Solution: 160 INVESTMENT ANALYSIS a. HPR for 2014 (NAVas~ NAVa0u) + CGaos + Divine ee NAVane s 15 — Rs 10) “Bess s07% =0.875 or 87.5% : RST b. APR for 2015 INAVo016~ NAV2015) + CGons + Divzors HPRas = NAVanis isnt Rel RS 60 10953 or 9.33% . s Hence, HPR for 2014 and HPR for 2015 are 875 percent and ~ 935 respectively, my During the past three years, the Pluto Fund produced the followin financial results. Calculate the annual returns on an investment in the Platy Fg over this period. NAV at beginning of year (in Rs) NAV at end of year (in Rs) Income distribution (in Rs) Capital gains distribution (in Rs) We have, Her, = WAW=NAVu) + CG,+ Div NAViy For year 1 Hr, = (Rs1440-Rs 1389) +0124029 in For year 2 1595 ~ Rs 14.40) +025 +033 HPR, = GSTS Rs Hal) + 025 +033 = 0.1479 or 14.79% For year 3 FPR, &515:20-Rs 15.95) + 005 +036 15.95 =~ 0.0213 or -2.13% Thus, holding period return for year 1, year 2, and , Year 3 are 6.62 percent, 4) Percentand - 2.13 percent respecti a. Calculate the HPR, b. Assume that there is no load fee, Calculate the HPR, Given: Total investment = Rs 1,000 Net assets value at beginning (NAV, ) = Rs 48 Cash dividend (Div) = Re Offering price = Rs 50 Netassets value at end (NAV) = Rs 51 We have, PR =.MUTUAL FUNDS AND OTHER nvEstueNr coup a. HPR with load fee: anes HPR b. HPR with no load fee: HpR = RSST=Rs 48) +Rs0+Ret ‘Therefore, HPR with load ‘sue coors ane Taian Percent and HPR with no load fee is 8.33 percent. trading at Rs 50 per the end of year al = — the stockbroker charged a 3 percent commis Ses ata price of Rei career Tested Re 1 per share of dividends and sold the eee Per share before the brokerage commission. b Ansume that there considering the brokerage commission. are bi ‘ bain no brokerage commissions. Calculate the HPR. Total investment = Rs 10,000 Purchase price / Beginning price = Rs 50 Broker's commission = 3% Dividend received = Rs 1 Selling price/ Ending price = Rs 51 a. Calculation of HPR considering brokerage commission Beginning price = Rs 50-+ Rs 50 x 0.03 = Rs 51.50 Ending price = Rs51 - Rs 51 x 0.03 = Rs 49.47 pr = Entling.price Beginning price + Dividend received Beginning price _Rs49.47- Rs 51.50+ Rel ‘= -0.02 or -2% * Rs 51.50 b. Calculating of HPR without brokerage commission PR?” “= Ending price ~ Beginning price + Dividend received jeginning price Rs 51-Rs50+Re1 lS Rs 50 0.04 or 4% “Thus, holding period return with brokerage and without brokerage are -2 percent and 4 percent respectively. the following assets and liabilities Suppose the mutual funds ha Rs 500,000 Rs 200,000 Rs 250,000 Stocks| Bonds Accounts payable ‘There are 1000 shares outstal ‘a. Whatis the NAV? bb, Suppose the firm sells ano! is 2 percent? ts = Stock + Bond Total assets “750,000 + Rs 200,000 = Rs 700,000 cilities Accounts payable Rs 50°00 Naber of shares outstanding ~ 7000 shares a. NAV “Number of Share outstanding = 250,000 _ Rs 450,000 _ Beso 7 RS 450 ining. ther 100 shares, what is the selling price if the load fee162. INVESTMENT ANALYSIS NAV 1 = Load fee in fraction Rs 450 =Ta9.027 Rs-459.18 b. Selling price = Mlustration 4.12" Assumed that you placed a Rs 2,000 investment with a ee that hap eng ord on 755 percent load, Management and other fees charged by the fund tota) tap on er annum. Ignoring other costs, during six years, what annual return wont a initial investment 4 duce to equal the value that your initial nt woe oan ee jing 6 percent interest? (Assun 4, earned in a savings account paying 6 p une compounding of income and no taxes.) Mi Solution: Given: Investment amount = Rs 2,000 Load fee = 7.5 percent Management and other foe = 1.10 percent Interest rate = 6 percent Future value of mutual funds = Future value of saving account Rs 2,000 (1 - 0.075) (1 + HPR - 0.011)6= Rs 2,000 (1 + 0.06)¢ Now, or Rs 1,850 (0.989 + HPR)*= Rs 2837 7 Rs 2,837 Rs 1,850 or 0.989 + HPR = (1,5335)1/6 oF 0.989 + FIPR = 1.07386 or HPR = 1.07386 - 0,989 = 0.0849 = 8.49% Therefore, the annual return, the value of two investments, or (0989+ HPR)6= ‘Spproximately 8.49 percent required to produce eq Mlustration 4. An investor has Rs 10,000 to use in Purchasing the shares of a fund and js roan At considering the following funds all of which have rece NAV of Rs 10 perstare — Closed-end fund A is selling for a market price that equals its NAV, whereas cose nd fund Bis selling ata 20 percent discount, Rs 8 (Re 10 5 0.80). The broker care @ commission of 2 percent of the market Price for each share purchased. Mutual funds C is a no-load fund, whereas mutual funds D charges an 8 % percent laa How many shares does the investor end up with in each case? Solution: ‘Table showing given information oa A B Cc D Tnvesiment amount [Rs 10,000] Re Topo0 Rs 10,000 Rs 19000 NAV Rst0 Rs 10 Rs10 Rs10 Market price Rs 10 Rss Rs10 Rs10 Brokerage foe 2% 2% - . Load fund . 2 85% Number of shares 2 2 2 2 Wehave, Number of shares = Z2tal investable fund Cost per share For closed-end fund A 104 Number of shares = ie ea = 980.39 sharesVa Solution: MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES chapters 165 Working notes: Cost per share For closed-end fund B = Rs 10 + 2% of Rs 10 = Rs 10.20 Number of shares = 8810000 Shares = 5816 7 1225.50 shares Working notes: Cost pershare- =p For closed end fund ©” SO™ O02" Re BE Number of _Rs10,000 ofshares =“) ~ = 1,000 shares For closed-end fund L. Rs 10,000 Number lumber of shares ="Re7y 3° = 914.91 shares Where _ NAV T=Load fee Rs 10 =T- 0.085 ~ Rs 10.93 Cost per share has a portfolio of (On January 1, the Pashupati Value Fund, an investment company n shares assets worth Rs 102 million and liabilities of Rs2 million. If it has 4 ™ outstanding on that date: a. What is the Fund's NAV? b. Suppose, the Fund made income and capital gain distributios Rs 2and Rs 3 per share and ended the month with a netasset va is the monthly return? ¢. Suppose, an investor paid Rs 26 (Re 1 being fro! investor's return for the month? n of respectively, Jue of Rs 27, what int-end load) per share, what is the Given: Market value of assets = Rs 102 million Liabilities = Rs 2 million Number of shares ‘outstanding (NSO) = million Market value of assets - Liabilities a. The required NAV = a Ons __Rs.102million=2 million _ p95 4 million b. Income/dividend (Di) = Rs2 Capital gain = Rs3 Ending NAV (NAV) = Rs 27 pans [NAVi= NAV. D+ 6G The required HPR = NAV-1 3 ad ‘Rs 25 o164 INVESTMENT ANALYSIS Mlustration 4,15 fotaiexdeeSendl a 12h plan or a fund ‘2b chage Solution: ‘Assume that an investor is trying to decide between investin, a front-end load [eneneenepenerenines [mas Fad AEP] =o Annual 12b-1 charge 1% ne : i " istics of both the f The investor thinks that the risk and other characteris fa and that each fund will provide an annual HPR of 11 percent before consis load fee and 12b - 1 charge. Assume the investor has Rs 10,000 to invest 8 fund, ; a. Calculate the anticipated rupee values of each investment afte ath holding period. Assume annual compounding, Which fund appears tones alternative? ; bet D. Answer part'a' assuming a 7-year holding period. © Calculate the length of the holding period that would make the be COTsideny 8 IN a noIgap nds a indifferent between the two funds. d. Explain why the length of the antici comparing load fees with annual Given: Annual HPR = 11% Present value = Rs 10,000 4 Calculation of antici pated holding period should expenses such as 12b-1 charge, ipated rupee values of each investment We have Future value = Present value G+ijy Forfund A. FV = Rs 100001 + (0.11 -0.01)= Rs 13,310 For fund B BY gk 10:0 (1 0.05) x (1+0.11)3= Re 12,992.49 b. Calculation of future value at the end of 7 years For fund A FV = Rs 10000[1 + 0.11 -o0ny7=Rs 19,487.17 For fund B ey = Rs 10,000 (1 - 0.05) x «1 + 0.117 = Rs 19,723.52 “fe Be indifferent future value of the funds should by FV of fund A= EV of fund B a Rs 10,000 (1+ (0.1 -0.01)}+= 10,009 a ©F 10,000 (1 + 0.10)» = 9,500 (1+ 0.11) £11)" _ 10,000 °F oye = 9,500 OF (1.0091) = 1.05263 Taking log on both sides 1 log 1.0091 = log 1.05263 ~ 0.05) (1+ 0:11)oo MUTUAL FUNo: 8 AND OTHER investuenr COMPANIES = Chapter 4 168 ist of Formulae Market value of ass. ets — Li wr NAV" Number of shares outstanding * (41) wr offer price per share = Net Assets Value Per Share 1-Load Fee in Fraction ° : (Discount) « Current Market Price - Net Asset Val rae ae ‘Net Asset Value = . arn RD (44) (Number of shares Endi Holding period return = at end of period * wen) being of per ee) of period * price. Number of shares Initial oO ae t beginning of period * ae :xpenses (excluding brokerage cost Beginning NAV oo Minimum Value of Securities Purchased or Sold (Ending NAV + Beginning NAV)/2 or Expenses Ratio = w Portfolio Turnover Ratio = B Review Questions indicate whether the following statements are true or false. Support your answer with reason: Investment companies are major types of financial intermediary. T Small investor can take benefit of diversification by investing in investment company’s: share Portfolio manager is always required in unit investment trust. Netassets value (NAV) is calculated by dividing total assets by number of shares outstanding Closed-end funds have authorized share capital. Number of shares of mutual funds rarely changes. Open-end funds are more popular than close-end fund in Nepal Organized stock exchange is required to buy and sell the mutual fund's share, Price of closcd-end-funds always equals to net asset value (NAV). ‘ABC mutual funds has 10,000 shares outstanding Its total assets is Rs 250,000 and total li Rs 50,000, NAV per share is Rs 20. IL. NAV of open-end fund is Rs 20 If fund's front-end load fee is 5 percent, the offer price be Rs 19. 12. The Z-fund, a closed-end investment company’s NAV pet share is Rs40 and share is trading at 10 percent discount. The market price of Z-fund’s share is Rs 36.6 teal funds one year ago by Purchasing 1,000 shares of the fund at the 1B. You invested in the no-load mut ser reels valle of Rs 25.00 per share. The fund distributed dividends of Rs 3.00 and capital gains of Rs 1.00, Today, the NAV is Rs 26. Your holding period return should be 20 percent. Th. You are considering the purchase of shares in @ dlosed end-mutual funds. ‘The NAV is equal to Co ee premium. 18. An open-end fund has a net asset value of Rs10.70 per share. It is sold with @ frontend load of 6%. ‘The offering price is Rs 11.38. 16. Ifthe offering price of an open-end fund is Rs12.30 per share and t load of 5%, its net asset value is Rs 12.94. 17. Corporate Fund started the year with a net ass Rs12.10. The fund paid year-end distributions of relurn to an investor in the fund is 88 percent. { een ase ee fhe fund is sold with a front-end ot value of Rs1250. By yearend, its NAV equaled f income and capital gains of Rs1.50. The rate of166 INVESTMENT ANALYSIS ‘What do you mean by Investment Company Describe major types of investment com, —~ by Investment Ci es of mutual funds. Whats mutual funds? Explain the advantages and disedvantags cd. Differentiate between closed-end fund and open-end = 7 Whats net assets value (NAV)? How do you pert ices provi ual funds. Expt vas seve poviely mbna Discuss the different types of fecs and charges that mig] in di cs, Explain different types of ‘mutual fun . : neni the factors tobe considered while selecting right mutual sai ae Bry deserve some of the investor services provided by mutual ands. Wha = reinvestment plans, and how do they differ from automatic investment plans? 10, Discs the veous yee fk to which fond shareholders are exposed. What i "exposure of mutual funds? Are al funds subject to the same level of risk? Explain, 11. Write notes on: value of a mutual fund ~eenageene ma b. Load vs. no load fund a. Unit investment trust ¢. — Closed-end vs. open-end fund d. — Netasset value (NAV) fe. Exchange-traded fund (ETF) f Hedge fund & — Tumover ratio h. Expenses ratio ing, and its assets consist ofc Netasset value stock with an aggregate market value of Rs 5,000,000 and liabilities of Rs of Ashar 31, What is the NAV per share of the fund? ake @ Problems Problem 41. ABC mutual funds has 200,000 shares outstandi = sotemé2: The ABC closed-end fund has investment of Re 420 million in securities, yy million in liabilities, and 20 million she i a 7 shares outstanding. pall oe nding, Tt trades at a 10 pera: a. What is net asset value of the fund? . Whatis the current pice ofthe fund? Problem 4,3, i Nauman estors. Currently, the fund bs { Rs 50,000. The fund's portions i Problem 44, | =47. gb rn Problem 4.9. pd Problem 4.10. anaroun Problem 4.11. edn ptnd oun MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES ‘The Closed Tund is a closed-end inv worth Rs 200 million. It has fi outstanding. a. Whatis the NAV of the fund? b. If the fund sells fc Ihe or Rs 36 per share, what is its premium or discount as a percent of estment company with a portfolio currently iabilities of Rs 3 million and 5 million shares A mutual f al io has 1,000 shares of XYZ Co,, currently trading at Rs 150, and 2,000 q ‘., currently trading at Rs 140. The fund has issued 10,000 shares. a. What is the NAV of the fund? B. IfInvestors expect the price ofthe XYZ Cos shares to Increase to Re 180 and Pt BC Co. shares to decline Rs 110 by the end of the year, what is the expected NAV at the end of the year? ¢. What is the maximum that the price of ABC Co. can decline to maintain the NAV as estimated in (a)? At the beginning of the year, the Star Fund's NAV was Rs 200. At the end of the year, its NAV was Rs 300. At year-end, the fund paid out Rs 50 in income and capital gains, What was the return on investor in the Star Fund during the year? Consider the following data on an open-end mutual funds: NAV on January 1 Distribution at end of year (Rs) Dividends Capital gains Rs 100 30 190 6 10 120 . E a. Calculate the HPR for 2014. b, Calculate the HPR for 2015. ‘Assume that an individual invested Rs 10,000 in a closed-end fund. The shares were trading at Rs 120 per share and the stockbroker charged a3 percent commission. At the end of year one, the investor received Rs 10 per share of dividends and sold the shares at a price of Rs 125 per share before the brokerage commission. a. Calculate the FIPR considering the brokerage commission. b. Assume that there are no brokerage commissions. Calculate the HPR. ‘A closed-ond fund starts the year with a net asset value of Rs 12. By year-end, NAV equals Rs 12.10, At the beginning ofthe year the fund is selling at a 2% premium to NAV. By the end of the year, the fund is selling at a 7% discount to NAV. The fund paid year-end distributions of income and capital gains of Rs 1.50. an investor in the fund during the year? a. What is the rate of return to turn to an investor who held the same securities b. What would have been the rate of ret as the fund manager during the year? individual invests Rs 10,000 in an open-end mutual funds. The «d the offering price of the shares is Rs 124. At the end of year one, sells the shares at a NAV of Suppose that an NAV is Rs 120 an the investor receives Re 1 per share of dividends and Rs 125, a. Calculate the HPR. b. Assume that there is no load fee. Calculate the HPR.~ 168 INVESTMENT ANALYSIS Problem 44: otdng peed etn Problem 4.13, king psd et Problem 4.14. ‘Average anal ‘campound ao run Problem 4.15, Holding period return Problem 4.16, Hekdng period atu A year ago, an investor bought 200 shares of a mutual ong at ped & Over the past year, the fund has paid ee of Rs 0.90 per share ang we ital gains distribution of Rs 0.75 per share. : apap holding period return, given that this no-load fund no,, - net assets value of Rs 9.10. _ b. Find the holding period return, assuming all the dividends and capita, ~ distributions are reinvested into additional shares of the fund at an average of Rs 8.75 per share. A year ago, the Sagarmatha Growth Fund was being quoted a a LNAY of Rea, and an offer price of Rs 23.35. Today, it's being quoted at Bi .04 (Nal = Rs 25.04 (offer). What is the holding period return on this loa fund, given that was purchased a year ago and that its dividends and capital gains distributions gt the year have totaled Rs 1.05 per share? You've uncovered the following per-share information about a certain Muy funds, [coe eos 2014 Ending dare Rs46.20 | Rs61es ha, 4320 | 6047 Dividend income 210 26 Capital gains distribution 1.83 6.26 Beginning share prices: Offer 55.00 NAV 5142 On the basis of this information, find the fund's holding period return for an, 2014, and 2015, (Inall 3 cases, assume you buy the fund at the beginning ofthe ya and sell i at the end of each year.) In addition, find the funces average annul compound rate of return over the 3-year period, 2013-2015, One year ago, Delphi Closed-End Fund had a NAV of Rs 1 18% discount. Today, its NAV is Rs 11.69 and it is priced at a 4% Premium. During the year Delphi paid dividends of Rs 0.40 and had a capital gains distribution of Rs 0.95, On the basis of the above information, calculate each of the following, a. Delphi's NAV-based holding period return for the year. b. Delphi's market-based holding period return for the year. Did the market Premium/discount hurt or add value to the investor's return? Teturn calculation, except this tine 18% premium and ended it at a 4% 205 Reo 375 261 42 61468 our 10.40 and was selling atan End of the Yeat Market price of the fund shares Dividends paid over the year Capital gains distribution over the yearMUTUAL FUNDS aw: D OTHER I INVESTMENT COMPANIES «chapter 4 169 a. Based on this infor b. Find the Paoeiee oe what was the NAV-based HPR for the SCEF in 2015? the beginning of the ) premium or discount at which the fund was trading at 5 ae and at the end of the year. ket ondissount add to ae HPR for the fund in 2015? Did the market premium ott! oo hurt the holding period return on this CEF? Explain. re core a te ee ot tvested in the Hamro Mutual funds by purchasing 1,000 need the income, you a assets value of Rs 20.00 per share. Because you did not Today, you sell your 1 lected to reinvest all dividends and gains distributions. a. What is the co 100 shares in this fund for Rs 22.91 per share. . my period? pounded rate of return on this investment over the 3-year b. IF there we : user sees 3% load on this fund, assuming you purchased the same number res, what would your rate of return be? poblem 418. The composition of the Fingroup Fund portfolio is as follows: soaoetse Steck Shares Trice Laat e 200,000 RS 35 c 300,000 40 D 400,000 20 600,000 25 int fee with the The fund has not borrowed any funds, but its accrued manageme! portfolio manager currently totals Rs 30,000. There are 4 million shares outstanding, a, What is the net asset value of the fund? b. If during the year the portfolio manager sels all of the holdings of stock D and replaces it with 200,000 shares of stock E at Rs 50 per share and 200,000 shares of stock F at Rs 25 per share, what is the portfolio turnover rate? rote 39% ‘Assume that an investor is trying to decide between investing in a no-load fund feieedbad¥vs with a 12b-1 plan or a fund with a front-end load: Jona 12 charge Front-end load fee Anmual 12b - 1 charge “The investor thinks that the risk and other characteristics of both the funds are equal ide an annual HPR of 12 percent before considering the and that each fund will provic load fee and 12b - 1 charge. ‘Assume the investor has Rs 10,000 to invest in either fund. a. Calculate the anticipated rupee valu holding period. Assume annual comy better alternative? b. Answer part (a) assuming a six-y c. Calculate the length of the hol indifferent between the two funds. 4. Explain why the length of the anticipated holding period should be considered in comparing load fees with ‘annual expenses such as 12b-1 charge. es of cach investment after a three-year pounding, Which fund appears to be a ear holding period. ding period that would make the investor170 INVESTME! Problem 4.20. ogee lan Problem 4.21. be sas Problem 4.22. Muna nds prance Problem 4, Fees and oxperses Problem 4.24, Pesto rover vr hi ravestment with a mutual funds y 000 it q placed @ Ren nd other fees charged by the fung os, Managem ts, during five years, what anny, tl, ing other cos bod eee race 0 equal the value that your initia jn, °, Pings account paying 5 percent et (sss no taxes.) ‘ in purchasing the shares of a fund 4 f which have the same NAV of Rei Assumed that you an 85 percent load. mnt per annum. would the fund have to would have carned in a 52) compounding of income and to use ‘An investor has Rs 1,000 a considering the following funds, = i Is its NAV, F is selling for a market price that equal N : Whereas g = eee sta 20% discount, Rs (RS 10 x os The broker chen’ commission of 2% of the market price for each share purc| e : tal fang sored fund, whereas mutual funds [charges an 8 ¥t% Toad. How many tloes the investor end up with in each case? Consider the following data on two mutual funds: Fund A ia Total net assets (assets less liabilities) atthe beginning of the year 1,000,000 | 109 Number of shares outstanding at the beginning of the year 100,000 Toon) Annual operating expenses Rs 10,000 Rsiam Value of securities sold during year Rs 500,000 Rs stony Value of securities purchased during the year Rs 400,000 Rs oman Brokerage fees forthe year Rs 9,000 Reta Number of shares outstanding at the year-end 110,000 Total net assets at the year-end Rs 1,100,000 For each fund, calculate the following: a. The NAVs per share at the beginning and end of the year. Assume that te operating expenses and brokerage fees are reflected in the NAVs, >. The expense ratios, using the NAVs at the beginning of the year. . The portfolio turnover ratios. 4. Do you think the higher operatin, eaten i expenses for Fund B are justified? Exphie Do you think the higher portfolio turnover ratio arejusiid? Explain your anocs and brokerage fees for Fund worth Rs 1 million. During the year, the inves a Rs 90 per share and 5,000 shares of Ci 165 per share, ~ The proceeds are used to buy 1,000 sharesMUTUAL FUNDS AND O71 HER INVES STMENT COMPANIES 171 + Chapter 4 a, What was the portfoli Portfolio tumover rate? b. If the shares in FedEx originall were purchased for RS 1260, ard ya erenased for Rs 80 each and thst in Cisco indi i if the investor's tax rate on capital gains income * 15%, how much extra will the i iearascliong? (4107 Will the investor owe on this years taxes as a result of these Consider a mutual fund wit woe with 10 million faa . nae 200 million in assets at the start of the year and ” st provides dividend income ae ‘The fund invests in a portfolio of stocks that the end of the year of Rs 2 million. The stocks included in the fund's portfolio i un are no al pana in price by 8%, but no securities ae sold, and there deducted from portfolio tributions. The fund charges 12b-1 fees of 1%, which are end of the year? What i assels at year-end, What is net asset value atthe start and ? What is the rate of return for an investor in the fund? ‘The New Fund had i rans ae plete fay assets of Rs 2.2 billion in the past year. The fund 0 purchased Rs 500 milli i we a. What was its turnover ratio? million worth of stock during the year- b. 1 New Fans epeae to 11% and the emg foo was fund’ " Sree cinni eee investment managers during the year? ¢. You purchased 1,000 shares of the Ne na a lew Fund at a price of Rs20 per share at the ae of the year. You pnd a frontend load of 4%. The securities i> which the fund int ees value by 12% during the year. The fund's expense ratio is = at is your rate of return onthe fund if you sll your shares atthe end of the You are considering an investment in a mutual fund with a 4% load a ratio of 5%. You can invest instead in a bank CD paying 6% interest hat annual rate of return must the fund portfolio ‘nthe fund than in the CD? Assume annual 7%, what were ‘What were the spoblem 4.27. nd an expense rl ‘a. Ifyou plan to invest for two years, earn for you to be better off compounding of returns. 1b. How does your answer change if answer change? c. Now suppose that instead of a front-end los per year. What annual rate of return must eit in the fund than in the CD? Does your at horizon? you plan to invest for six years? Why does your ad the fund assesses a 12b-1 fee of 75% ‘fund portfolio earn for you to be better nswer in this case depend on your time Case Analysis NIBL Equity Fund has issued management fee obligations 0! below the fund has accrued investment [[50,000 shares to investors. Currently, osed of seven stocks as shown £ Rs 40,000. The fund's portfolio is comps Shares.172 ~ INVESTMENT ANALYSIS .. What is the net asset value per share of the NIBL Equity Fund? | . Ifthe fund trades at 6 percent discount from net asset value, what is the current prego, . If investors expect the price of the Stock A, B, C to increase by 10 percent and the pri, hy 7 Price of. and F to decline by 3 percent at the end of year, what is the expected net asset value»! eT Per ght . Suppose you purchased the fund at a price calculated in part ’b’ and sold the fund ag," at its year-end net asset value calculated in part ‘c’. If the fund charges 4 percent backer th fee, what is your rate of return from the investment over one-year period? nd - If there were 3 percent load fee on the share purchase at the beginning and no back eng what would be your rate of return? Assume that NAV at the beginning is as calcutaig and net asset value at the end is as calculated in part ‘c’. Pay oo