Determinants of Expense Ratio in Open End Mutual Funds of Pakistan

Abstract

Mutual funds are one of the most studied and interesting areas of research in developed countries due to efficient risk management and higher returns through professional asset managers. These funds increase the return of small investors as well as reduce the unsystematic risks in the financial decisions. Previous literatures of Mutual funds primarily discussed performance and expense ratio of the different categories of the funds. However, the determinants of expense ratio analyzed in the current study have not been previously examined in the context of Pakistan. One of the major factor which contributes in order to improve performance of mutual funds have been ignored, is expense ratios specially related to age, size and nature of fund category. The study revealed that all variables including age, size, nature and sponsors of the fund have significant impact on the expense ratio of fund. Further, except size of fund, positive relation was observed with the age, nature and sponsors of fund with expense ratio. The study revealed that expense ratio of mutual fund industry is ranging between three to four percent which is comparably high from the regional market. The regulator needs to cap the expense ratio at certain level to avoid any additional cost paid by the investors. Further, the investor should pay special attention towards expense ratio with reference to their sponsors, its maturity level and quality of management to earn better returns.