Sept 99

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 ...

 

same problem with assignment 1.2!!!

 

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!!!

 

Many thanks!