The Tradeoff Between Mutual Fund and Direct Stock Investments - A Theoretical Analysis Involving Different Types of Investors

Download or read book The Tradeoff Between Mutual Fund and Direct Stock Investments - A Theoretical Analysis Involving Different Types of Investors written by Marcel Fischer and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.