Mutual fund management costs and lifetime wealth accumulation : a consumption utility function

Abstract

I am studying how mutual fund management costs affect lifetime wealth accumulation and thus consumption utility. I take an individual who is 25 years old and starts saving for retirement, retires at age 65 and stays retired until age 90. Such an investor is faced with the decision whether to invest in actively managed mutual funds or passively managed mutual funds. A simulation of 1,000 scenarios is performed, where returns are randomly drawn from the sample of net-of-fees real fund returns from the period of 1977 to 2016. I find that in 92.8% of cases an investor experiences greater consumption utility if she is investing in passively managed mutual funds. I conclude that higher fees of actively managed mutual funds outweigh supposedly higher returns and do not result in higher consumption utility.