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Mutual Fund Cash Flow A model for the balance between the expenses to pay back amortizing notes and the income from fees generated by mutual funds is presented. We provide two basic models, one static and the other dynamic, for the performance of the mutual fund fees. The static model assumes that the Net Asset Value (NAV) of the mutual fund grows at a predetermined rate. The alternative model assumes that the growth rate of the NAV varies either. The fund manager pays outright commissions to the broker who buys units of the mutual fund to his customers, while the customers do not pay anything at the time of purchase. The fund unit holders, however, pay fees to the fund management annually. The fund sells these future cash flows to one party and uses the proceeds to pay the broker commissions. To finance the purchase of the future cash flows, the party issues amortizing notes. The fees generated by the mutual fund are of the two kinds. The first are called 12b-1 fees and they are a fixed percentage of the NAV of the fund. The second are redemption fees. These fees are calculated as a percentage of the net asset value of the redeemed shares and this percentage varies with the age of the redeemed shares, typically diminishing to zero over a period of 5-8 years. At the discretion of the fund manager, up to ten percent of the redeemed shares may be exempt from the redemption fee. As the fund pays dividends, a portion is reinvested into the fund. The shares that are bought on the reinvested dividends can be redeemed without the redemption fees and are therefore called “free shares”. Fee collection, amortizing payments and interest compounding are made monthly. Dividends are paid and reinvested annually. Both static and dynamic models take annual schedules of redemption rates, redemption fees, and redemption fee exempt rates as input parameters. NAV/share, dividend yield (called redistribution rate), dividends reinvestment rate, and the amortization period are also input parameters
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