ALLANA MANAGEMENT JOURNAL OF RESEARCH, PUNE - Volume 3, Issue 1, January 2013- June 2013

Pages: 91-96
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STRENGTHENING MUTUAL FUND PERFORMANCE WITH THE APPLICATION OF CORPORATE GOVERNANCE

Author: A. Anbu, M. K. Sindhu , Chitra Cherian Samuel , M.Urmial Dheyi

Category: General Management

Abstract:

This paper shows the relationship between mutual fund governance and mutual fund performance. My work is based on the relation between the design of mutual fund shares and incentive problems in the mutual fund industry. It then describes an alternative split design that alleviates the problems. The current design of the mutual fund claim leads to diffusion in ownership and a customer focus on net return. Both effects remove incentives for fund investors to monitor and discipline the fund board, particularly wfth respect to shareholders fees. Competitions based on net return does not provide incentives for managers to lower fees when the class of competing funds exhibits a high cross-sectional variation in total return.

A return share has all the characteristics of a current mutual fund share except that it has guaranteed fees and no voting rights. A fees share receives the guaranteed fees and pays the actual fees of the specific return share to which it is linked and the fees share has voting rights. Proceeds from the sale of a fee share accrue to the linked return shareholder.

Board discipline arises naturally from the fee shareholders. Monitoring is economically viable for large investors in fee shares. Fee shareholders, who are owners, pressure boards via their votes to govern effectively. Shareholders want low fees. A fee share expires when its linked return share is redeemed.

KEYWORDS

Incentive, Fund Investors, Share Holders.