Cheaper is Better? Evidence From China Fund Expense and Performance

The expense of mutual fund sustained a substantial growth in recent years, but do the expense of fund genuinely contribute to the fund performance? We examine the relation between the expense of Chinese actively managed equity funds and their performance. We show that the expense has a negative effect on the excess return of funds, which is consistent with the well-established negative relation from previous research of the mutual fund in U.S. In subsequent heterogeneity analysis, we also find that the fund’s return volatility strengthens the negative effects, whereas its age and size did not. After further analysis and additional results, we can also explore how other factors influence the fee-performance relation, especially the family size and the growth of net value which are closely intertwined and exerting a positive influence because of the interplay policy framework and markets emphasis. The findings augmented the theoretical discourse pertaining to fee-performance relation in the sample of China and established a theoretical underpinning for the progression of further expense alleviation reforms within the fund sector.