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Working Paper

The Impact of Shrouded Fees: Evidence from a Natural Experiment*

Santosh Anagol and Hugh Kim

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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 nd 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.

[Keywords: closed-funds, expenses, investors, mutual funds, India, stock market, load]