Behavior Of Fund Investors Research Articles

Taking matters into their own hands: How Investors' stock preferences affect mutual fund flows in China

We examine the impact of investors' stock preferences in mutual funds' portfolios on fund flows in China. Our results indicate that mutual funds with an investment style consistent with individual investors' stock preferences have higher fund flow. We find that it affects only individual investors' fund flow, not institutional investors' fund flow. This impact is greater during periods of low economic policy uncertainty or high investor sentiment. Moreover, this impact is reduced with larger fund size or longer fund age. The reasonable explanation is that investors infer fund managers' skills by analyzing the stocks in the fund's portfolio. This explanation is further validated by the results using index funds as the control group. Our findings challenge the assumption that mutual fund investors fully delegate decisions to professionals. Further analysis reveals there is no significant correlation between these preferences and future returns. Our findings contribute to the study of mutual fund investor behavior from a fresh perspective.

Determinants of Investment Behavior of Investors towards Mutual Funds – A Study

The purpose of this paper was to provide empirical evidence on investor behavior towards mutual funds by collecting into account its relationship with age, education, and occupation. A questionnaire was used to collect data from 100 mutual fund investors, and 176 questionnaires were used for the analysis. Furthermore, the simple sampling technique was used to collect data from various locations in Warangal. The findings provide better information and guidance to investors and policymakers on the factors that influence mutual fund investor behavior.

Mutual fund net flows in China: A co-holding network perspective

As the largest part of the mutual fund, open-end funds play a critical role in the Chinese mutual fund market. In this work, we construct an undirected weighted fund network of Chinese open-end funds based on the asset co-holding and explore whether funds’ co-holdings influence their net flows. The network structure traits are introduced into a panel data model to examine the impact of the asset co-holding network on fund flow changes. It is revealed that when a fund has more connections with other funds, indicated by a higher degree in the co-holding network, it receives more net flows. However, when the average co-holding value of a fund increases, its outflows outnumber the inflows. Furthermore, heterogeneity analysis suggests that this effect particularly exists for low-performance funds. The implications of these findings for fund investor behavior and the fund market are also discussed.

Modifying Theory of Reasoned Action to Determine Online Mutual Fund Investor Behavior

Market penetration for mutual fund investments is still very low compared to other investment instruments such as deposits, gold, property, stocks, and peer-to-peer lending. Thus, the opportunity for mutual fund investment to develop in Indonesia is still very large. This study was conducted to determine what factors influence the behavior of online mutual fund investors by modifying the theory of reason action. The factors used to measure the behavior of online mutual fund investors are investor attitudes, subjective norms, financial literacy, financial performance, and investment intentions. The survey was conducted online to respondents from various regions in Indonesia. Sampling of 1117 respondents using the purposive sampling method. The results showed that partially investor attitudes, subjective norms, financial literacy, financial performance have a positive and significant effect on investment intentions. Investment intention as a mediating variable has a positive and significant relationship to consumer behavior. The results of this study are expected to be used by mutual fund sellers who are expected to be able to implement effective marketing strategies that can increase their managed funds and increase the number of online mutual fund customers in Indonesia, as well as increase the attractiveness of these mutual funds.

The Way to Use Information on Long-term Returns: Focus on U.S. Equity Funds

Purpose - The purpose of this study is to show the need to use the past long-term returns for investment decisions in U.S. equity funds and to suggest an investment strategy using long-term returns. Design/methodology/approach - This study solves the problem of high return volatility in long-term returns and proposes new investment portfolios based on the behavior of fund investors according to past returns. For the investment portfolio of this study, 60 months are divided into several periods and the average of the performance ranks for each period is used. Findings - First, funds with high average returns over multiple periods have lower future outflows and higher future returns than funds with high 60-month cumulative returns. Second, funds with low average returns over multiple periods have lower future inflows and lower future returns than funds with low 60-month cumulative returns. The findings mean that when making decisions based on past long-term returns, it is a smarter investment choice to buy funds with high average returns over multiple periods and sell funds with low average returns over multiple periods. Research implications or Originality - This study shows that it is necessary to use long-term returns in fund investment by analyzing the characteristics of the portfolio based on past returns. In addition, the study is meaningful in that it suggests a way to use long-term returns more efficiently based on the behavior of fund investors and shows that such investments lead to higher returns in the future.

Extreme Positive Payoffs and Mutual Fund Flows：Empirical Analysis Based on Chinese Mutual Funds

Domestic mutual fund investors show obvious short-term speculative behavior. They pay excessive attention to short-term performance, blindly chase funds with outstanding short-term performance, but the returns they earn are not high. Such behavior is related to investors’ lottery preference. They exhibit a preference for assets with a small probability of a large payoff because they overweight the probabilities of such an extremely positive outcome in a payoff distribution. The pricing implications of this preference have been studied in the stock, option, and IPO markets. Here we investigate how lottery preference affects investors’ mutual fund trading behavior.We use each fund’s maximum monthly return over the previous six months（hereafter, MAX）to represent investors’ lottery preference, and intend to verify that MAX can positively predict fund flows. Our sample covers 852 actively managed open-ended equity funds from year 2005 to 2019. First, we investigate whether MAX can positively predict future fund flows. We find a positive and significant relationship between MAX and future fund flows: a 1% increase in MAX is associated with an incremental flow of 1.43% over the following six months. This is in line with investors’ preference for extreme positive payoffs. Second, we investigate whether buying mutual funds based on MAX is rational. We find that high MAX cannot predict superior future performance: a 1% increase in MAX will cause 0.15% decrease in CAPM alpha. So it is irrational. Third, we investigate the heterogeneity of MAX－Flow relationship across investors with different rationality. We find that the positive MAX－Flow relationship exists in individual investors’ mutual fund flows, but it is not significant in institutional investors’ mutual fund flows. Lastly, we demonstrate that limited attention theory cannot fully explain our MAX－Flow relationship. After controlling the star fund effect, the positive MAX－Flow relationship still holds. The above results are robust.Our paper makes contributions to at least two areas of the literature: First, we directly prove that lottery preference steadily exists in the mutual fund market, which deepens our understanding of Chinese mutual fund investors’ behavior and expands the research of MAX anomaly. Different from the research based on the stock market, this paper uses the fund flow data to directly observe the trading behavior of fund investors, and constructs a complete research path of “MAX－investors’ trading behavior－fund performance”. It is found that lottery preference only exists in individual fund investors, and institutional investors are not obvious; funds with extreme positive return MAX in the past will have lower future returns, which enriches the research on the influencing factors of fund performance. Second, we find that the extreme return of funds will affect investors’ fund selection behavior, which enriches the research on “fund performance－fund flows”. Previous studies on “fund performance－fund flows” focus on the influence of the average or cumulative value of historical returns on fund flows, but pay less attention to the influence of the distribution characteristics of fund historical income on fund flows. This paper finds that funds with extreme positive returns in the past will get more fund inflows in the future, which is enlightening for the regulatory authorities to supervise the investment behavior of fund managers.

The Economic Impact of Mutual Fund Investor Behaviors

This study analyzes how equity mutual fund investor behavior has changed over time, and the associated impact on investor returns. First, we find that from 1991-2016 investor return-chasing behavior declined and more recently disappeared, while investor flows have become more sensitive to expenses, past risk and alpha. We also present evidence that these changes correspond to changes in word usage and attention to alphas, past returns and fund expenses in the popular press and academic journals. Investors now pay more attention to fund characteristics that have the potential to improve future performance (e.g. risk, alpha and expenses), and less attention to characteristics that don’t (e.g. past returns). Second, we examine the effect of increased attention to fund alphas on investors’ realized performance. We confirm the well-documented positive persistence of alpha, but note that this positive cross-sectional persistence in alphas measures the net effect of two distinct phenomena: the cross-sectional variation in average alphas across funds (Harvey and Liu, 2018), and the time-series autocorrelation of alpha within each fund. Both properties are independently relevant: fund selection relates to investors’ ability to exploit variation in alphas across funds; timing relates to the ability to exploit the autocorrelation patterns within a given fund. We show that at the fund level, alphas have strong negative serial correlation. Lastly we decompose total mutual fund investor Performance Gap into fund selection and timing components, then further decompose each of these into pieces related to each individual determinant of the cashflow, so that we can determine how much each individual behavior contributes to both fund selection and timing. Even though investors realize some benefit from selecting high-alpha funds (smart money), they time their cash flows very poorly by investing in those funds after periods with the highest realized alphas (dumb money). The dumb money effect dominates, and we show that chasing alphas reduces investor returns by three times as much as chasing past returns. Overall, our results suggest that mutual fund investors have learned that alpha is important, but have not yet learned how to effectively integrate this knowledge into their investment decisions.

Investment Decisions Under Ambiguity: Evidence from Mutual Fund Investor Behavior

We provide novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to fund performance. Our analysis is motivated by theoretical models of decision making by ambiguity-averse investors. A key implication of the models is that when investors face information signals of uncertain quality, they place a greater weight on the worst signal. We find strong empirical support for this prediction in the form of heightened sensitivity of investor fund flows to the worst performance measure across multiple horizons. This effect is particularly pronounced for retail funds in contrast to institutional funds. This paper was accepted by Neng Wang, finance.

(The Behavior of Fund Investors in China According to the Experience and Intentions of Investment Education)

Korean Abstract: 본 연구에서는 중국의 펀드투자 경험이 있는 금융소비자를 대상으로 펀드투자 관련 교육의 경험과 의향에 따라 ‘투자교육경험집단’, ‘투자교육 잠재집단’, ‘투자교육 무관심집단’으로 분류하여 펀드투자행동에 어떠한 차이가 있는지를 살펴보았다. 이로써 투자교육과 의향이 펀드투자자의 행동에 어떻게 반영되고 있는지를 파악하고 향후 중국금융소비자들의 투자교육에 대한 기초자료를 제공할 수 있을 것으로 생각된다. 본 연구의 결과를 바탕으로 중국의 펀드투자시장에 대한 제언을 하면 다음과 같다. 첫째, 중국의 펀드투자자는 정보획득과정에서 스스로 정보를 탐색하기보다는 주변 사람을 의존하여 소극적으로 탐색하는 편이다. 따라서 투자자들에게 정확한 정보를 제공하기 위해 접근성이 좋은 채널 확보와 만화나 스마트폰 앱 등과 같이 보다 쉬운 방식으로 관련 내용을 전달할 수 있도록 노력하여야 한다. 둘째, 모든 집단에서 투자자정보 확인서 작성, 투자자성향진단, 투자설명확인서 확인 등에 대해 솔직하게 작성하지 않는 투자자 존재하였으나, 투자교육을 받은 집단이 다른 집단에 비해 그 비중이 상대적으로 더 적었다. 이는 금융회사나 중국소비자협회에서 투자자들에게 투자관련 교육을 제공하여 금융소비자의 책임감을 이끌 수 있음을 의미한다. 셋째, 금융소비자로서 이행해야 하는 행동을 올바르게 수행한 비중은 투자교육 경험집단, 투자교육 잠재집단, 투자교육 무관심집단의 순으로 나타났다. 따라서 향후 투자교육 대상자를 선정할 경우 그 효과가 높을 것으로 예상된다. English Abstract: This study targets China's investors, with the aim of studying investment behavior with regard to the fund-purchasing process. In particular, the study focuses on the investment behavior and its dependence on the experience and intentions of invest education. The findings suggest the necessity of education, and education should be treated as a basic material. The results of this study are summarized as follows: First, based on the investment behavior results, the “source of information on the fund before purchase for the “education was mainly from the financial institutions' specific instructions, as well as the company's website, whereas the “potential educational mainly used Internet information. When registering a fund, the first consideration of the “unconcerned with education was the company's reputation regarding operational assets, with 32.4 percent indicating this, which is higher than for the other two groups. Before purchasing a fund, 32% of investors compared four or more different funds for the “education and the “potential educational group, as opposed to only 13.2% for the “unconcerned with education Second, with regard to investors who buy funds through financial institutions, the investment behavior when purchasing a and the reasons for the financial institutions selected can be divided into three categories: for the “education group, the major reason is to select the type of commodity; for the “unconcerned with education group, the major reason is proximity to home or company; and the “potential education pays attention to the qualifications of the sales staff qualifications. A higher proportion of the education group checks the qualifications of sales staffs, avoids companies that have received negative news recently, confirms investment instructions carefully, and asks for further explanation if they do not understand. Based on these results, education plays a key role in determining purchasing, and has an important and positive impact on investment behavior. In addition, education for those purchasing funds through networks also plays a key role. Third, in examining the results on whether or not investors check the management report, the “education and the “unconcerned with education have a higher relative proportion. The “education members are educated so they read the management report, which further demonstrates the need for education. For the “unconcerned with education group, although they have a high proportion who read the management report, their lack of intention to seek further education reflects their over confidence in understanding products. In reviewing the results on the frequency of investment achievement and assets constitute content confirming, the “education and the “potential education do not often confirm investment results, which is consistent with Park (2015), who examined investment in education of those showing over confidence. The “unconcerned with education group, in comparison with the other groups, confirm the outcome of investments relative to the high frequency. Several recommendations are presented based on these conclusions: First, in order to provide accurate information to investors, financial institutions need to establish easily accessible channels, such as comic books and mobile phone software. Second, in investor information confirmations, tendency determinations, instructions confirmations, and other processes, there are no real circumstances of individual consummation. The correct use of specific educational content will correct investment behavior. Third, among the investors, few correctly performed the action, with the proportions increasing in the order of the “education group, “potential education group, and the “unconcerned with education group. The “potential education can be better predicted with respect to the potential effects of higher education than the other groups, and potential education needs to be targeted in educational research.

Do Fund Investors Drive Mutual Fund Performance?

We provide a solid framework in analyzing of what drives mutual fund performance in Chinese mutual fund industry, and show that fund performance is determined not only by efforts of fund manager, but also by fund investor behavior. Our empirical evidence shows that the total purchase and redemption of fund investor contribute to the nondiscretionary trades of fund manager, in which they positively affect fund turnover and negatively affect fund performance. It yields the similar results when testing the effect of purchase and redemption of fund investors separately. Controlling for the impact of erratic fund investor behavior, the negative turnover-performance relation turns into positive. This indicates that the discretionary trades by fund manager would have positive impact on fund performance and confirms the point of view that fund manager owes great skills for fund investment. The debate over the sign of turnover-performance relation is actually concluded with manager or investor, which dominates.

Investment Decisions Under Ambiguity: Evidence from Mutual Fund Investor Behavior

We provide novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to fund performance. Our analysis is motivated by theoretical models of decision making by ambiguity-averse investors. A key implication of the models is that when investors face information signals of uncertain quality, they place a greater weight on the worst signal. We find strong empirical support for this prediction in the form of heightened sensitivity of investor fund flows to the worst performance measure across multiple horizons. This effect is particularly pronounced for retail funds in contrast to institutional funds.

The dynamics of short-term mutual fund flows and returns: A time-series and cross-sectional investigation

This study analyzes the dynamics of daily mutual fund flows. A Vector Auto Regression (VAR) of flows and returns shows that the behavior of fund investors is more consistent with contrarian rather than momentum characteristics. Past fund flows have a positive impact on future fund returns, with the long-term information effect dominating the transient price-pressure effect. Seasonality in daily flows, such as day-of-week and day-of-month patterns are present, and daily flows are generally mean-reverting. Probit regressions indicate that fund investment objective, marketing policy and level of active management explain cross-sectional variation in the behavioral patterns displayed in daily flows. Our results are robust to the different methods of calculating daily flows based on whether or not the day-end TNA figures include the current-day’s flow. Throughout the analysis, we contrast the dynamics of daily flows with established results for monthly fund flows and find important differences between the two.

Mutual Fund Investor Behavior Across the Business Cycle

Mutual fund investor behavior changes across the business cycle. In economic expansions, investors strongly display the documented behaviors of chasing returns and searching for managerial skill. Expansion investors earn higher returns and alphas by pursuing this strategy, but this result is partially explained by the momentum effect. In contrast, recession investors do not chase returns and exhibit a weaker tendency to seek alpha. Even before controlling for momentum, no smart money effect exists in recessions. Instead of chasing performance, recession investors make investment decisions to change their exposure to aggregate risk factors. Investors tend to avoid funds with exposure to the market and book-to-market factors during recessions, while they show the opposite pattern in expansions.

Behavioral Factors in Mutual Fund Flows

Using a sample of daily net flows to nearly 1,000 U.S. mutual funds over a year and a half period, we identify a set of systematic factors that explain a significant amount of the variation in flows. This suggests the existence of a common component to mutual fund investor behavior and indicates which asset classes may be regarded as economic substitutes by the participants in the market for mutual fund shares. We find that flows into equity funds -- both domestic and international -- are negatively correlated to flows to money market funds and precious metals funds. This suggests that investor rebalancing between cash and equity explains a significant amount of trade in mutual fund shares. The negative correlation of equities to metals suggests that this timing is not simply due to liquidity concerns, but rather to sentiment about the equity premium. We address the question of whether behavioral factors spread returns by using the mutual fund flow factors as pre-specified regressors in a Fama-MacBeth asset pricing framework. We find that the factors derived from flows alone explain as much as 45% of the cross-sectional variation in mutual fund returns. The fund flow factors provide significant incremental explanatory power in the cross-sectional regressions on daily returns. We consider a number of alternatives to explain our evidence including causality from returns to flows and vice-versa. Our evidence is consistent with the existence of a pervasive investor sentiment variable.