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Sept 99

N

NeedToQualify

Member
Hi,

In this question a fund has an initial charge of 2.5% and annual charge of 1% of the fund value. It says that for a lump sum investment the impact of the charges after 5 years is 1.6%.

Any idea how it is calculated????
 
Hi

My take on it is as follows:

Say 100 invested initially, accumulating at 6% p.a.

At the end of year 5, the fund is 100*(0.975)*(1.06)^5*(0.99)^5 = 124.08 This translates into an annual return of 4.40%. The reduction in return due to the management charges is thus 6% less 4.40%, which gives 1.6%.
 
Thanks.

However this method depends on the investment return assumed.

e.g. if the investment return is 10% the impact relative to the investment return is 1.65%. The examiners comment also state that this is not dependent on the investment return.

So if you do (0.975)*(0.99)^5=0.9272 then the average 5 year return is 1.50% which i think should be the correct answer.

what do you think???
 
Hi

Ja, sorry, no clue where I pulled the 6% from.

I don't see how it can be independent of investment returns though ... the solution you proposed would imply a 0% return, so it's still dependent on that?

Hhhmm, tad bit confused now ... :cool:
 
????? has got the right idea. The fund is accumulated allowing for charges at a particular rate and then the reduction in yield due to charges is calcuated.

The method does depend on the growth rate assumed. In marketing literature these rates are prescribed, and in 1999 the mid-rate would have been 6%.

I can't see where the question says the rates are "not dependent on the investment return". It does say that the charges do not vary
according to the size of investment, which is rather different!
 
Thanks!

I was referring to:
"Some scripts stated that the rate of investment growth was important. This was incorrect when determining the relative impact of charges on these funds."

So I guess this means that investment return is not important because it's the same for both funds?

In assignment x1.2:
1) Can you explain how the 1.6% is calculated? I calculate it as 1.5%:
(11856/10000)^(1/5)-1.05

2) Can you explain how the 3 year period is calculated for investments of 30000 for fund B?

Thanks!!!
 
Ah! Yes, it means the investment return isn't relevant in the solution.

(1) You are doing the right calculation

(11856/10000)^(1/5) -1 = 3.4%
So, 5% - 3.4% = 1.6%
(or 1.536% if I'd have kept some more decimal places!)

Note that the same calculation for Fund A gives 1.58%, so the question is simply giving a "round" number.

(2) If you compare fund values over time for an investment of £30,000
t Fund A Fund B
1 £30,405 £30,167
2 £31,606 £31,517
3 £32,855 £32,928
4 £34,153 £34,401
5 £35,502 £35,940

So, fund A is better, unless you are investing for at least 3 years, when B is better.
 
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