Distribution Fees and Mutual Fund Flows: Evidence from a Natural Experiment in the Indian Mutual Funds Market

Abstract

Mutual fund companies typically charge investors distribution fees, such as 12b-1 fees in the United States, which they then use to pay commissions to brokers. We evaluate a major Indian investor protection reform that limited the ability of mutual funds to charge distribution fees to pay broker commissions. We identify the impact of this policy change by comparing funds charging high distribution fees prior to the reform to those charging low distribution fees; we show that trends in asset growth across these groups prior to the reform were similar, and argue that a comparison of their asset growth after the reform is indicative of the policy impact. Contrary to claims by industry that banning distribution fees would dramatically reduce investment in mutual funds, we find no evidence that the post-reform asset growth was lower for funds charging higher distribution fees prior to the reform. We primarily find that asset growth in funds with previously high distribution fees was higher after the policy change. At the aggregate level, our results suggest that Indian mutual fund growth in the post-policy period was lower for reasons independent of this policy change, such as a general move away from mutual funds towards real assets such as gold and real estate following the 2008 financial crisis.

Do changes in distributors' incentive structure drive mutual fund flows?

“…We also observed that changes in AUM showed a higher drop than changes in gross distributor MF sales and changes in distributor commission D1 Vs D2 - (ΔGSit D1: 1.6(0.00); D2: 1.45(0.005), ΔAUM it D1: 0.27(0.013); D2: 0.16(0.190), ΔCOMMit D1: 1.63(0.000); D2: 1.32(0.000). The results extend the observation of (Anagol et al. , 2013), who did not find any significant effect on mutual fund flows advised by distributors, as they continued to pay upfront commissions even after the ban.…”

“…Some related studies (e.g. Anagol et al. , 2013, 2017) tried to capture the effect of the ban on mutual fund front load (2009) for equity funds, excluding other types, and did not find any significant effect on mutual fund flows advised by distributors.…”

“…Investors usually invest through distributors based on the feeling of trustworthiness with them (Chan and Chan, 2011). However, distributors are typically not subject to fiduciary standards to make them act in the best interests of their clients and may, therefore, push them toward suboptimal investment choices that maximize distributor commissions rather than investment returns (Anagol et al. , 2013; Mullainathan et al.…”

“…These proposals have generated mixed reactions. While some studies (Inderst and Ottaviani, 2012) argued in favor of distributor commission, others (Anagol et al. , 2013; Mullainathan et al.…”

The case of the missing billions: estimating losses to customers due to mis-sold life insurance policies

“…In India, there have been several instances of mis-selling by insurance companies and mutual funds (Anagol and Kim 2012;Anagol, Cole, and Sarkar 2012;Anagol et al 2013). The response in the case of mutual funds has been to ban upfront commissions as early as 2009.…”