Why are investors’ mutual fund market allocations far from optimal?

In this paper, we analyze the differences between an optimal portfolio of funds that an investor may take under complete information and the actual structure of the mutual fund market characterized by a fund’s risk profile (conservative or aggressive) as well as the type of investor (retail or wholesale) at which a fund is aimed. We find that, with the exception of the fees, the relationship between the fund age, the market share and the change in the fund’s total net assets and the optimal portfolio of funds depends on the mutual fund market structure.