Daily mutual fund flows and redemption policies

Abstract

We examine how redemption policies affect daily fund flows in open-end mutual funds. Since short-term trading of fund shares, as manifested in daily fund flows, can have an adverse impact on returns to the fund's shareholders, mutual funds might find it desirable to discourage shortterm trading through the use of redemption fees. However, if daily fund flows are due to fund shareholders' legitimate liquidity demands, the redemption fee would have little effect on daily fund flows and possibly adversely affect fund shareholders by imposing a liquidity cost on them. We find that the likelihood of a fund charging a redemption fee is largely a function of its overall fee structure. We also use a sample of funds that imposed redemption fees to examine whether the distribution of daily fund flows changes after the initiation of the redemption fee. We find that the redemption fee is an effective tool in controlling the volatility of fund flows.2

Do Investment Flows Drive the Disposition Effect on Fund Managers?

“…Their results is consistent with Greene et al (2007), who found that even a redemption fee has no significant adverse impact on fund returns, it can be used to efficiently control the volatility of fund flow. Reconcile these findings, we propose that the behavioral bias of stock investment is pronounced under outflow condition, and there is asymmetric effect on asset allocation and trading behavior of fund manager for inflow and outflow fund portfolio.…”

Mutual fund portfolio trading and investor flow

“…Even so, Friesen and Sapp (2007) demonstrate that returns chasing behavior is detrimental to active fund traders' performance. Recently, the SEC has encouraged mutual funds to impose redemption fees on relatively short term traders, to compensate the remaining fund shareholders for the costs created by flow (Greene et al, 2007).…”

Agency costs, governance, and organizational forms: Evidence from the mutual fund industry

“…Our first measure is the fees that a fund charges its shareholders. Fund fees are at the center of the agency conflict between the fund management company and fund shareholders (Del Guercio et al, 2003;Bogle, 2005;Friesen and Sapp, 2007;Green et al, 2007;Cao et al, 2008). Higher fees enrich the fund management company, while eroding the net performance enjoyed by fund shareholders.…”