Question

If a fund has an initial NAV of $23 at the start of the month and a new NAV at the end of the month of $24.25, along with income distributions of $0.18 and capital gains distributions of $0.07, what is its rate of return? What would the rate of return be if the NAV declined to $22.99?

Answer 1

The rate of return on an investment in a mutual fund is calculated by adding the capital gains and income distributions to the ending NAV, subtracting the initial NAV, and then dividing by the initial NAV. For the provided figures, the rate of return is 6.52% for an ending NAV of $24.25 and 1.04% if the NAV declines to $22.99.

Step-by-step explanation:

To calculate the rate of return for an investment in a mutual fund, we sum up the capital gains and income distributions, and then compare that total to the initial net asset value (NAV). In the first scenario, where the ending NAV is $24.25, with an initial NAV of $23, income distributions of $0.18, and capital gains distributions of $0.07, the total return is:

Ending NAV ($24.25) + Distributions ($0.18 + $0.07) - Initial NAV ($23) = Total Gain

Now, let's compute it:

$24.25 + $0.18 + $0.07 - $23 = $1.50

The rate of return is therefore:

(Total Gain / Initial NAV) x 100 = Rate of Return

($1.50 / $23) x 100 = 6.52% rate of return

For the second scenario, if the NAV declines to $22.99, the calculation would be as follows:

Ending NAV ($22.99) + Distributions ($0.18 + $0.07) - Initial NAV ($23) = Total Gain/Loss

$22.99 + $0.18 + $0.07 - $23 = $0.24

Then:

(Total Gain/Loss / Initial NAV) x 100 = Rate of Return

($0.24 / $23) x 100 = 1.04% rate of return