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The Dilution Impact of Daily Fund Flows on Open-end Mutual Funds

Jason T. Greene

Southern Illinois University

Charles W. Hodges

State University of West Georgia - Accounting & Finance

February 11, 2000

We examine how fund flows that are correlated with subsequent fund returns can impact the performance of open-end mutual fund through a dilution effect. Since these flows tend to put cash into a fund just prior to positive returns on the fund?s risky assets, the cash dilutes the fund?s return. Our analysis reveals that active trading of open-end funds occurs and has a meaningful economic effect on the passive, non-trading shareholders in the fund. While in the overall sample of domestic equity funds we find no dilution impact from daily fund flows, we estimate an annualized benefit of nearly 5 basis points in low-flow funds. In examining the fund flows in international funds, we find an overall annualized negative impact of 0.48%. For the sub-sample of funds in which flows are particularly large, this negative impact is nearly 1% per year. Our results suggest that the structure and design of mutual funds, such as exchange and pricing policies, can have important performance-related implications independent of the value added by the portfolio manager.

Number of Pages in PDF File: 52

JEL Classification: G1, G10

working papers series

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Date posted: March 23, 2000  

Suggested Citation

Greene, Jason T. and Hodges, Charles W., The Dilution Impact of Daily Fund Flows on Open-end Mutual Funds (February 11, 2000). Available at SSRN: http://ssrn.com/abstract=215968 or http://dx.doi.org/10.2139/ssrn.215968

Contact Information

Jason T. Greene (Contact Author)
Southern Illinois University ( email )
Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1421 (Phone)
Charles W. Hodges
State University of West Georgia (formerly Western Georgia) - Accounting & Finance ( email )
Department of Accounting and Finance
Richards College of Business
Carrollton, GA 30118
United States
(770) 836-6469 (Phone)
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References:  26
Citations:  48
Footnotes:  20

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