The total ownership cost link between Islamic mutual funds performance and its determinants in Malaysia

Abstract

The rise of the mutual fund industry has prompted studies on mutual fund performance. Investors are increasingly concerned about mutual fund performance when making investment decisions requiring information and guidance. This study examines relationships between determinants of mutual fund performance, namely before-fee performance, fund governance, and market timing ability, on total ownership cost and mutual fund performance. This study further scrutinizes the mediating effect of total ownership cost on the determinants of mutual fund performance. The previous research has mainly focused on the impact of fees and mutual fund performance with great attention on conventional mutual funds compared to Islamic mutual funds. However, this comprehensive study contributes different perspectives by using efficient market theory, asset pricing theory, transaction cost theory, agency theory, and interdisciplinary theory of performance in explaining the relationship among the variables. The results have shown a novel contribution to the link of total ownership cost in Islamic equity fund performance. Panel data regression analysis and structural equation modeling were used to evaluate the association between variables and the mediation effect on the data during the study period from 2008 to 2020, covering the economic recovery stage and current global pandemic crises in the Malaysian mutual fund market. The result suggests a significant relationship between before-fee performance, market timing ability, and total ownership cost with fund performance. Additionally, fund governance has shown a negative association with total ownership cost. The total ownership cost mediates fund governance and performance, demonstrating that costs are more consistent with performance. The findings provide valuable insight into the factors that influence fund performance and cost determination to assist mutual fund providers and policymakers in widening Islamic equity funds.