Economies of Scale in Mutual Fund Administration

Abstract

Since many mutual fund expenses are fixed costs, asset growth should reduce the ratio of fund expenses to average net assets. A translog cost function is estimated for a sample of 2, 610 funds to evaluate the existence and extent of economies of scale in mutual fund administration. The elasticity of fund expenses with respect to fund assets is significantly less than one, indicating there are economies of scale in mutual fund administration. Average costs diminish over the full range of fund assets; however, the rapid decrease in average costs is exhausted by about $3.5 billion in fund assets.