“LARGER THE FUND SIZE, LOWER THE EXPENSE RATIO IN LARGE-CAP MUTUAL FUNDS: A 10-YEAR PERFORMANCE EVALUATION”

Abstract

The current research addresses the question of the relationship between fund size and expense ratio, specifically for large-cap mutual funds, particularly within the context of the Indian mutual fund industry, which has provided a wealth of such products for about a decade. The goal is to determine whether the large ratios incurred by those with greater economies of scale will remain or whether this will become the case in any market. The methodology employs correlation and regression analysis to see how historical data on expense ratio and fund size or asset sizes has changed over time. Among the key findings, there is a noticeable negative relationship between the fund sizes and the expense ratios, although, as witnessed, some inefficiencies set in for extremely large funds. The implications of these findings point to a new approach in performance targets of fund managers, where growth should be tempered with economics of fund operations, and, for that matter, investors looking for cost and size should rethink the traditional method of selecting funds. Keywords: Mutual Funds, Fund Size, Expense Ratio, Large-Cap Funds, Lower Cost.