Wharton Pension Research Council Working Papers

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Working Paper

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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-ended funds were started in the 66 months prior to this period collecting .42 billion $U.S., and no closed-ended 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.

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Copyright/Permission Statement

Opinions and errors are solely those of the authors and not of the institutions with which the authors are affiliated. © 2010 Boettner Center of the Wharton School of the University of Pennsylvania. All rights reserved.


Thanks to James Choi, Shawn Cole, Todd Gormley, Olivia Mitchell, David Musto and Shing-Yi Wang for helpful comments. Yuqing Fan, Anant Shukla, and Amit Agarwal provided excellent research assistance. All errors are our own.

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Date Posted: 07 August 2019