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The Impact of Shrouded Fees: Evidence from a Natural Experiment in the Indian Mutual Funds Market

38 Pages Posted: 19 Aug 2010 Last revised: 26 Nov 2011

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business, Department of Finance

Santosh Anagol

University of Pennsylvania - Wharton School of Business - Business Economics and Public Policy Department

Date Written: August 3, 2010

Abstract

We study a natural experiment in the Indian mutual funds sector that created a 22 month period in which closed-end funds were allowed to charge an arguably shrouded amortized fee whereas open-end funds were forced to charge standard entry loads. We find that allowing closed-end funds to charge the shrouded type of fee led to a proliferation of closed-end funds in the market; 45 new closed-end funds were started over this 22 month period collecting 9.1 billion $U.S, whereas only two closed-end funds were started in the 66 months prior to this period collecting .42 billion $U.S., and no closed-end funds were started in the 20 months after this period. We argue that other theoretical determinants of the closed versus open ended organizational form did not change discretely around the natural experiment and thus are unlikely to explain the sudden emergence and disappearance of closed-end funds. We find closed-end funds did not perform better in terms of raw or risk-adjusted returns. If all the investors in closed-end funds during this period had invested in the lower fee open fund variety instead they would have paid 4.25 percent less in fees over this 22 month period, equal to approximately 500 million dollars in extra fees.

Suggested Citation

Kim, Hugh Hoikwang and Anagol, Santosh, The Impact of Shrouded Fees: Evidence from a Natural Experiment in the Indian Mutual Funds Market (August 3, 2010). Available at SSRN: https://ssrn.com/abstract=1660988 or http://dx.doi.org/10.2139/ssrn.1660988

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business, Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Santosh Anagol (Contact Author)

University of Pennsylvania - Wharton School of Business - Business Economics and Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

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