Indian mutual funds: Pay to sell

A mutual fund (also known as a unit trust) is a pool of money that is invested in shares, bonds, or other securities. The fund is made of shares or units that individuals investors may purchase. Mutual funds may charge an “entry load” on purchases of shares and an “exit load” on sales of shares.

The entry load is a percentage fee on a purchase of shares in the fund. For instance, if a fund charges an entry load of 2%, then an investor who pays $100 would receive shares worth $96. Similarly, the exit load is a percentage fee on the sale (redemption) of shares.

The table below reports exit loads for several Indian mutual funds that invest in bonds. The typical exit load is 0.5-1.0% on redemptions of small investments, and a reduced or no load on redemptions of larger investments. Evidently, the market for small investments is less competitive that that for large investments.

Source: Company websites, August 24, 2004.

Increasing demand and the market for gasoline

Suppose that the price of gasoline is presently $2 per gallon and sales are 500 million gallons a week. How will a 3% increase in household income affect the price and sales of gasoline? Referring to figure 5.7, the increase in household income will cause the demand for gasoline to shift to the right. The increase in household income, however, will not affect the supply of gasoline. Accordingly, there will be a new market equilibrium with higher price and quantity.

To calculate the new equilibrium using the procedure just given, we need the relevant elasticities. Previous research provides the following estimates. The price elasticity of the demand for gasoline is 0.23, while the income elasticity is 0.39.a Further, the price elasticity of the supply of gasoline is 0.62.b

The first step is to calculate the percentage change in the quantity demanded. Let %p represent the percentage change in price. Then, the percentage change in the quantity demanded due to the change in price will be 0.23 x %p. The percentage change in the quantity demanded due to the increase in income will be 0.39 x 3 = 1.17. Hence, the percentage change in the quantity demanded due to the changes in price and income will be 0.23 x %p + 1.17.

The next step is to calculate the percentage change in the quantity supplied. The percentage change in the quantity supplied due to the change in price will be 0.62 x %p.

The third step is to equate the percentage changes in quantity demanded and quantity supplied. This implies that

0.23 x %p  1.17 = 0.62 x %p.

Solving this equation, we have

1.17 = (0.62  0.23) x %p,

which implies that the percentage change in price, %p = 1.17/0.85  1.38, which is approximately 1.4%. Hence, the 3% increase in household income results in the market price rising by 1.4%. Since the original price is $2 per gallon, the new price will be 2 x (1.014) = $2.2028.

The fourth step is to use the percentage change in price to calculate the percentage change in quantity. In this case, the equilibrium quantity will increase by a proportion of 0.62 x 1.4 = 0.87, or approximately 0.9%. Since the original quantity is 500 million gallons a week, the new quantity will be 500 x 1.009 = 504.5 million gallons.

Sources: (a) Molly Espey, “Gasoline Demand Revisited: an International Meta-analysis of Elasticities,” Energy Economics 20, no. 3 (1998), pp. 273-95; (b) Timothy J. Considine, “A Short Run Model of Petroleum Product Supply,” Energy Journal 13, no. 2 (1992), pp. 61-91.