Aggregate Mutual Fund Flows and Subsequent Market Returns

Abstract:     
This paper re-examines the relation between aggregate US equity mutual fund flows and the equity market returns in subsequent periods. Investigating aggregate monthly data in the years 1984-2003, we find a positive contemporaneous relation between flows and returns. This price change is partially reversed in the following nine months. The negative relation between flows and subsequent returns is consistent with risk premium changes that are negatively related to price changes and it causes mutual fund investors, as a group, to realize a long-term accumulated return that is lower than the long-term accumulated return on a buy-and-hold position in these funds.

Keywords: mutual funds, flows, market returns, price pressure

JEL Classification: G11, G12, G14, G23

working papers series