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.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2017