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Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows

Brad M. Barber
University of California at Davis

Terrance Odean
University of California, Berkeley - Haas School of Business

Lu Zheng
University of California, Irvine - Paul Merage School of Business; China Academy of Financial Research (CAFR)


December 2003


Abstract:     
We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient in-your-face fees, like front-end loads and commissions, than operating expenses; they are likely to buy funds that attract their attention through exceptional performance, marketing, or advertising. Our empirical analysis of mutual fund flows over the last 30 years yields strong support for our contention. We find consistently negative relations between fund flows and front-end load fees. We also document a negative relation between fund flows and commissions charged by brokerage firms. In contrast, we find no relation (or a perverse positive relation) between operating expenses and fund flows. Additional analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a fund's operating expenses, account for this surprising result.

Keywords: mutual funds, investor behavior, operating expenses

JEL Classifications: G11, G18

Working Paper Series

Date posted: May 03, 2004 ; Last revised: September 16, 2009

Suggested Citation

Barber, Brad M., Odean, Terrance and Zheng, Lu, Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows (December 2003). Available at SSRN: http://ssrn.com/abstract=496315


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Contact Information

Brad M. Barber (Contact Author)
University of California at Davis ( email )
Room 131, AOB IV One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)
Terrance Odean
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)
HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html
Lu Zheng
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA 92697-3125
United States
9498248365 (Phone)
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030 China

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