QUESTION FOUR

Mutual Funds$/$Unit trusts and Other Investment Companies

$($a$)$ What is a mutual fund or unit trust? Explain and discuss the business model of mutual funds. What role do they play in the economy, and in the financial sector in particular?

$(5$ marks$)$

$($b$)$ A mutual fund has assets of $K5092\mathrm{.}2$ million and K$4\mathrm{.}6$ million in liabilities with outstanding shares of $150\mathrm{.}6$ million. Calculate the net asset value $($NAV$)$ of the portfolio. $(5$ marks$)$

$($c$)$ Another mutual fund manages a portfolio of securities of $K120$ million. The fund owes $K4$ million to advisers and a further $K1$ million for running expenses and has $5$ million shares outstanding. Calculate the net asset value.

$(5$ marks$)$

$($d$)$ A mutual fund with K$100$ million in assets at the start of the year and with $10$ million shares outstanding invests in a portfolio of stocks that provides no income but increases in value by $10\%.$

Required:

$($i$)$ What is the rate of return in the fund? $(3$ marks$)$

$($ii$)$ If a fund has an initial NAV of $K20$ at the start of the month makes income distributions K$0\mathrm{.}15$ and capital gain distributions of K$0,05$ and ends the month with NAV of K$20\mathrm{.}10.$ Calculate the monthly rate of return. $(3$ marks$)$

$($iii$)$ An equity fund has a front end load of $4\%$ and special fees of $0\mathrm{.}5\%$ annually as well as back$-$end fees that start at $5\%$ and fall by $1\%$ for each full year the investor holds the portfolio until the fifth year. Assuming the rate of relum on the fund net of operating expenses is $10\%$ annually, what will be the value of a K$10000$ investment in the equity fund shares if the shares are sold after $1$ year, $4$ years and $10$ years?

$(4$ marks$)$

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