The Erosive Effect of Mutual Fund Expenses on the Terminal Wealth Value of Investors in Poland and Other European Countries

Abstract

One factor that has a critical impact on mutual fund investors' terminal wealth is the fees which investors incur directly or indirectly in connection with establishing and maintaining their investment. Applying the Sharpe's Terminal Wealth Ratio Analysis, this study shows that cost burdens imposed by mutual funds operating in Poland greatly exceed the cost burdens of comparable investments made in more developed European countries, magnifying the erosive effect on investors' terminal wealth value, especially as the investment horizon is extended. For example, over a forty-year investment period the reduction in investment performance (investors' terminal wealth value) attributed only to the disparity of mutual fund fees in Poland compared with the other European countries, on average, are as follows: about 35% in money market funds, 42% for fixed-income funds, 197% in the case of equity funds, and 234% in the case of allocation funds. This fact demonstrates both the immaturity of the Polish mutual fund market and a lack of economic knowledge and experience among domiciled  investors. This, coupled with the absence of sufficient involvement of public institutions to create a cheap, efficient and safe allocation mechanism for investors' savings, contributes to a much deeper erosion of their wealth than in developed countries.