News & Events

Tiwari Comments on Mutual Fund Trading

A key advantage of mutual funds is that investors can get their money out quickly -- a feature that comes at a huge cost, a provocative new study argues. The study by consultant and researcher Gary Gastineau alleges that the way fund shares are bought and sold each day, with millions of dollars sloshing in and out of funds just before or after the market close, whittles investor returns even more than the improper trading practices that have come to light in recent months. Effecting a tectonic shift in how fund shares or bought and sold -- making redemptions less immediate for example -- could also have unintended consequences. "The current redemption structure of mutual funds has a cost, but it has a real positive too," says ASHISH TIWARI, a finance professor and mutual-fund researcher at the University of Iowa, because the threat of redemptions focuses fund managers on performance. Rather than adjust trading deadlines, Prof. Tiwari and other observers suggest shareholder segregation: different fund share classes for frequent traders and buy and hold investors, so the former's added costs won't be paid by the latter.

Return to top of page