Differences in the Misclassification of Load and No-Load Mutual Funds

Abstract

The purpose of this study was to extend the research on mutual fund investment objective misclassification by analyzing the differences in investment objective misclassification in domestic load and no-load mutual funds. Although there has been significant research on open-end mutual fund misclassification, there has been limited research, exploring the difference between misclassification in load and no-load funds. Two research questions were answered: (a) are some load and no-load mutual funds misclassified, and (b) is there a difference in misclassification between load and no-load funds? Discriminant analysis was used to identify misclassified funds. A difference in proportions test was used to examine the difference in misclassification between load and no-load funds. The results indicated that, consistent with the literature, there was misclassification in both mutual fund samples. The load fund sample had a level of misclassification greater than the no-load sample. The results indicate that in the load fund sample, 55% of the original grouped cases were misclassified. In the no-load fund sample, 53% of the original grouped cases were misclassified. According to the Z test for the difference of proportions the null hypothesis, that the proportions of misclassified load and no-loads funds is equal cannot be rejected. There is no statistical difference in the proportions of no-load and load funds misclassified.

Keywords: mutual fund, misclassification, style drift, investment, load funds, no-load funds