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Net asset value, rate of return, and mutual fund investment strategies

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Net Asset Value, Rate of Return, and Mutual Fund Investment Strategies to Diversify Portfolio

Part I:
The net asset value (NAV) of the fund and rate of return to an investor in the fund are the two important concepts of mutual fund investment. Understanding the calculations of NAV and the rate of return are important to make investment decisions in mutual funds and to choose the best mutual fund investment strategies. To calculate NAV and rate of return, you have been provided the following hypothetical information on ProShares UltraShort Silver (ZSL) [http://ca.finance.yahoo.com/q?s=ZSL&ql=1]:

- Market value of assets in the beginning of the year (2011): $200,000,000
- Total liabilities: $10,000,000
- Number of shares outstanding: 17,393,910
- Net asset value (NAV) by the end of the year (2011): $10.94
- Distribution of income and capital gain per share/unit: $0.23

Based on the above information:
i) What was the net asset value (NAV) of the fund in the beginning of the year?
NAV = (Market value of assets - liabilities) / Shares outstanding

ii) What was the rate of return to an investor in the fund?
Rate of Return = (NAV1 - NAV0 + Income and capital gain distributions) / NAV0

Part II:
1. Assume you have set aside a certain amount of money to invest in mutual funds, and are trying to decide how to distribute your investment between actively managed funds and passively managed funds. To do this, you are going to need to do some research on the topic, looking into performance trends, forecasts, individual vs. group capabilities, and a host of other factors. You will also need to know something about the economic climate, prospects for the future, and the state of the market - as well as attend to your own priorities and investment goals and strategies.

2. Based on your analysis and findings, which investment strategy is better (Active or passive)? Which investment strategy would you recommend to other investors? Please explain your reasoning.

3. Based on the rate of return (Part I), would you invest in ProShares UltraShort Silver (ZSL) fund? Please explain your reasoning in brief.

Now look at the current performance (I.e., year to date return) of ProShares UltraShort Silver (ZSL) fund [http://ca.finance.yahoo.com/q?s=ZSL&ql=0 ; http://ca.finance.yahoo.com/q/pm?s=ZSL] and iShares Russell 2000 Index (IWM) [http://ca.finance.yahoo.com/q?s=IWM&ql=1 ; http://ca.finance.yahoo.com/q/pm?s=IWM].

4. Which fund is performing better? Based on the current performance, which professional fund manager is more effective to generate higher rate of return? Is it fund manager of ProShares UltraShort Silver or iShares Russell 2000 Index?

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The expert examines net asset values, rate of return and mutual fund investment strategies.

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Part I:
Given that,
Market value of assets in the beginning of the year (2011)= $200,000,000
Total liabilities= $10,000,000
Number of shares outstanding= 17,393,910
Net asset value (NAV) by the end of the year (2011) = $10.94
Distribution of income and capital gain per share/unit = $0.23

Net asset value (NAV) of the fund in the beginning of the year:
Net asset value (NAV)of the fund in the beginning of the year = ($200,000,000-$10,000,000)/17,393,910 = $10.9234

The rate of return to an investor in the fund:
Rate of return = ($10.94 - $10.9234 + $0.23)/$10.92 = 2.26%

Part II:
There are two types of fund management ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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