The Dilution Impact of Daily Fund Flows on Open-end Mutual Funds
Jason T. Greene
Southern Illinois University
Charles W. Hodges
University of West Georgia; Georgia State University - Department of Finance; Southern Illinois University at Carbondale - Department of 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
Date posted: March 23, 2000
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