Mutual Fund Liquidity and Fiduciary Conflicts of Interest

Abstract

Open-end mutual funds allow purchases and redemptions of shares daily at the closing net asset value. This practice imposes costs upon the mutual fund for portfolio adjustments and maintaining cash balances to handle inflows and redemptions. The cost of providing liquidity falls disproportionately on non-trading investors. This paper proposes charging fees for purchasing mutual fund shares and for redeeming mutual fund shares. The fees collected will become part of the assets of the fund and compensate non-trading investors for providing liquidity. This procedure reduces the incentives for the use of mutual funds as short-term trading vehicles.

Keywords: Open-end Mutual Fund, Net asset value, non-trading investors