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THE COST OF MUTUAL FUND DISTRIBUTION FEES
Author(s) -
Livingston Miles,
O'Neal Edward S.
Publication year - 1998
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1998.tb00680.x
Subject(s) - mutual fund , open end fund , income fund , distribution (mathematics) , target date fund , closed end fund , business , fund of funds , performance fee , stable value fund , expense ratio , finance , equity (law) , fund administration , investment fund , feeder fund , passive management , economics , institutional investor , mathematical analysis , corporate governance , mathematics , market liquidity , political science , law
Many individuals purchase shares in mutual funds as investments. With a lack of evidence supporting performance persistence in fund returns, investors should consider expenses as a fund‐selection tool since fund expenses have a negative effect on fund returns. One of the largest expenses incurred by fund investors is distribution expenses, which include both load charges and annual fees. Close to two‐thirds of all equity funds charge investors for fund distribution. The true cost of these distribution fees to investors is hard to measure because a myriad of distribution arrangements have evolved that vary both the timing and magnitude of distribution charges. We derive a simple methodology that expresses the present value of distribution costs as a percentage of the original investment in fund shares for any expected holding period. This methodology allows direct comparison of the effect on investors of distribution fees for mutual funds with different types of sales arrangements.