Equilibrium Accounting in the Mutual Fund Industry

Equilibrium Accounting in the Mutual Fund Industry

In this paper, the controversial argument that the mutual fund industry takes excessive profit from fund investors through sales expense is tested. The argument has attracted attention from the media, practitioners, and financial regulatory authorities. Unlike the previous studies that treat mutual fund expenses as a whole, Korean data are used to separately identify management expenses and sales expenses. Through a simple model it is shown that equilibrium accounting is not directly applicable to the mutual fund industry and that active mutual funds investment is not a negative sum game when overpriced sales expenses are eliminated. Admittedly, aggregate active investment per se is a negative sum game in the sense of equilibrium accounting.