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Distribution fees and mutual fund flows: Evidence from a natural experiment in the Indian mutual funds market

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Author Info

  • Santosh Anagol

    (Wharton)

  • Vijaya Marisetty

    (RMIT University)

  • Renuka Sane

    ()
    (Indira Gandhi Institute of Development Research)

  • Buvaneshwaran Venugopal

    (C.T. Bauer College of Business, University of Houston)

Abstract

Mutual fund companies typically charge investors distribution fees, such as 12b-1 fees in the United States, which they then use to pay commissions to brokers. We evaluate a major Indian investor protection reform that limited the ability of mutual funds to charge distribution fees to pay broker commissions. We identify the impact of this policy change by comparing funds charging high distribution fees prior to the reform to those charging low distribution fees; we show that trends in asset growth across these groups prior to the reform were similar, and argue that a comparison of their asset growth after the reform is indicative of the policy impact. Contrary to industry claims that banning distribution fees would dramatically reduce investment in mutual funds, we find no evidence that the post-reform asset growth was lower for funds charging higher distribution fees prior to the reform. We primarily find that asset growth in funds with previously high distribution fees was higher after the policy change. At the aggregate level, our results suggest that Indian mutual fund growth in the post-policy period was lower for reasons independent of this policy change, such as a general move away from mutual funds towards real assets such as gold and real estate following the 2008 financial crisis.

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File URL: http://www.igidr.ac.in/pdf/publication/WP-2013-004.pdf
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Bibliographic Info

Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2013-004.

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Length: 56 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:ind:igiwpp:2013-004

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Keywords: regulation; commission ban;

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References

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  1. Shawn Cole & Thomas Sampson & Bilal Zia, 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?," Journal of Finance, American Finance Association, American Finance Association, vol. 66(6), pages 1933-1967, December.
  2. Santosh Anagol & Shawn Cole & Shayak Sarkar, 2012. "Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market," Harvard Business School Working Papers, Harvard Business School 12-055, Harvard Business School, revised Jan 2013.
  3. Susan E. K. Christoffersen & Richard Evans & David K. Musto, 2013. "What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives," Journal of Finance, American Finance Association, American Finance Association, vol. 68(1), pages 201-235, 02.
  4. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  5. Panle Jia & Parag A. Pathak, 2010. "The Impact of Commissions on Home Sales in Greater Boston," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 475-79, May.
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Cited by:
  1. Monika Halan & Renuka Sane & Susan Thomas, 2013. "Estimating losses to customers on account of mis-selling life insurance policies in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2013-007, Indira Gandhi Institute of Development Research, Mumbai, India.

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