The Structure of Mutual Fund Charges

94-20

Posted: 13 Jul 1998  

Tarun Chordia

Emory University - Department of Finance

Date Written: April 1994

Abstract

This paper considers three reasons for the increasing popularity of mutual funds: diversification, transaction cost savings and risk sharing. Mutual funds represent a commingling of assets and are required to pay each redeeming investor a pro-rata share of the net asset value of the fund. This results in a better allocation of the liquidity risk amongst the investors. However, investors who redeem their holdings in mutual funds impose an externality on those that don't. Mutual funds will thus seek to dissuade redemptions through front-end and back-end (redemption) load fees. The empirical evidence is consistent with the predictions of the model that load and redemption fees dissuade redemptions in open-end funds and that funds hold more cash when there is increased uncertainty about redemptions. Furthermore, funds with load and redemption fees hold less cash than their no-load counterparts. The results suggest that aggressive growth funds are sensitive to cash flow and are likely to rely on fees to dissuade redemptions because they hold more of the smaller, less liquid stocks.

JEL Classification: G10, G20

Suggested Citation

Chordia, Tarun, The Structure of Mutual Fund Charges (April 1994 ). 94-20. Available at SSRN: https://ssrn.com/abstract=7043

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

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