What Is the Motivation of Closing an Open-End Fund: Investor Protection or Spill-Over Effect?

Closing of an open-end fund to new investors in mutual fund market is more and more popular. The reason fund families give for the closing of a fund is reasonable: by preventing the size of the fund from growing too large to be managed effectively, the previous superior fund can maintain its good performance, so the interest of investors can be protected. However, by comparing the performances of open-end funds before and after closing, we find that the performance of the funds becomes worse after closing. The closing of a fund can´t protect the interest of investors. Closing decision made by fund families is likely to be motivated by spill-over effect: by closing one of its funds, the fund family can attract the attention of investors and encourage them to invest in other funds of the family. There is strong evidence that closing a fund can bring more money inflow to the fund family.