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The tradeoff between mutual fund and direct stock investments: a theoretical analysis involving different types of investors
Copenhagen Business Sch, Dept Finance, DK-2000 Frederiksberg, Denmark.
Rhein Westfal TH Aachen, Sch Business & Econ, D-52056 Aachen, Germany.ORCID iD: 0000-0002-3384-7166
2014 (English)In: Review of Managerial Science, ISSN 1863-6683, E-ISSN 1863-6691, Vol. 8, no 2, p. 197-224Article in journal (Refereed) Published
Abstract [en]

We study the tradeoff between direct and indirect stock investments through equity mutual funds for a utility-maximizing investor. Whereas direct investments impose higher transaction costs on the formation of a well-diversified portfolio, mutual funds charge fees for their services. Our results show that the fee levels that make private investors indifferent between direct and indirect stock investments vary heavily according to risk aversion, the amounts invested, correlations between assets, transaction costs, and the length of investment horizon. In particular, our results suggest that for a wide range of actively managed mutual funds, the fees charged are too high for these mutual funds to appeal to a wide range of informed investors. However, accounting for search costs, such as costs for financial advice, can facilitate an understanding of the levels of management fees charged by mutual funds existing in the market.

Place, publisher, year, edition, pages
Springer, 2014. Vol. 8, no 2, p. 197-224
National Category
Business Administration
Identifiers
URN: urn:nbn:se:kth:diva-260788DOI: 10.1007/s11846-013-0101-9ISI: 000331696200003Scopus ID: 2-s2.0-84957438153OAI: oai:DiVA.org:kth-260788DiVA, id: diva2:1356076
Note

QC 20191003

Available from: 2019-09-30 Created: 2019-09-30 Last updated: 2019-10-03Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
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Language
  • de-DE
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  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
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  • asciidoc
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