How To Analyze Fund Flows

June 3, 2014
by Michelle Perry Higgins

Start Shopping for Long-Term-Care Insurance at 45How much money is flowing in or out of a mutual fund should be on your radar at all times. I would NOT, however, recommend following the herd in or out of a particular mutual fund but it is important to do your research to understand why the money inflow or outflow is occurring and what the consequences might be.

A lot of money flowing into a fund may be due to a number of things such as publicity, sector rotation, or a recent period of out-performance and might be positive or negative.  It can be viewed as positive if investors are confident in the management team and their longer-term track record. Also, the fund may lower its expense ratio as its expenses are spread over a larger pool of assets.

On the other hand, if the reason for the inflow is because the fund’s particular sector or style box had an extraordinary year, you may find money flow is just chasing past performance.  In addition, the larger the fund gets, the more difficult it may be to implement its strategy, especially if the fund targets areas like small cap stocks.

Anytime a significant amount of money is flowing out of a fund you need to peel back the onion and figure out what is going on. Has there been a significant change in the management team, or in the management of the fund family, that is justifiably causing investors to lose confidence?   If there is a flood of selling, will the fund be able to handle redemptions without having to liquidate investments that it would rather not have to sell?