Interfund Lending in Mutual Fund Families: Role in Liquidity Management

Review of Financial Studies, Forthcoming

68 Pages Posted: 16 Aug 2015 Last revised: 29 Nov 2018

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Haibei Zhao

Lehigh University

Date Written: November 28, 2018


Although the 1940 Act restricts interfund lending within a mutual fund family, families can apply for regulatory exemptions to participate in interfund lending. We find that the monitoring mechanisms and investment restrictions influence the family’s decision to apply for interfund lending. We document several benefits of interfund lending for the equity funds. First, participating funds reduce cash holdings and increase investments in illiquid assets. Second, investors in participating funds exhibit less run-like behavior. Third, it helps mitigate asset fire sales for participating funds subsequent to extreme investor redemptions. Offsetting these benefits, money market funds in participating families experience investor outflows.

Keywords: interfund lending, fire sales, financial fragility, liquidity management

JEL Classification: G28, G23, G32

Suggested Citation

Agarwal, Vikas and Zhao, Haibei, Interfund Lending in Mutual Fund Families: Role in Liquidity Management (November 28, 2018). Review of Financial Studies, Forthcoming. Available at SSRN: or

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)


University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923

Haibei Zhao

Lehigh University ( email )

621 Taylor Street, RBC 323
Bethlehem, PA PA 18018
United States

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