Handling Withdrawals

L1 28 Open End Mutual Funds Handling Withdrawals V2

L1 29 Open End Funds Holding Cash For Withdrawals V3

Holding Cash

The total return of an open end fund is a weighted average of its portfolio return and the return on its cash holdings.
The fraction invested in equities \times return on equities + fraction invested in cash \times return on cash = total return
\frac{1}{2} \times 10\% + \frac{1}{2} \times 2\% = 5\% + 1\% = 6\%

Total Return of an Open-End Fund

A mutual fund expects $10,000 of redemptions on any given day. So the fund keeps this amount in cash. It has $100,000 of Assets Under Management (AUM), $10,000 in cash, and remaining $90,000 is invested in a portfolio of stocks. Its portfolio of equities returns 5%, while the cash returns 0.5%. What is the total return of the fund?

2.75%

4%

4.59%

4.55%

SOLUTION:

4.55%