Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds?

Schmalenbach Business Review, Vol. 62, pp. 126-153, April 2010

37 Pages Posted: 15 Feb 2008 Last revised: 25 Nov 2013

Sebastian Müller

German Graduate School of Management and Law

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2010

Abstract

Previous research indicates that a lack of financial sophistication might explain the past strong growth in active management. We construct an objective financial literacy score and analyze the relation between financial literacy and mutual fund investment behavior. We show that there is a positive influence of financial literacy on the likelihood of investing in low-cost fund alternatives. However, we find that even the most sophisticated investors in our sample rely overwhelmingly on active funds. “Smart money” among smarter investors cannot explain this finding as there is only weak evidence of superior fund selection abilities among financially more literate investors. Our results indicate that the lack of financial literacy among most mutual fund customers cannot completely explain the past growth in actively managed funds.

Keywords: Better-than-Average, Financial Literacy, Investor Sophistication, Miscalibration, Mutual Fund Customers, Mutual Funds

JEL Classification: G11

Suggested Citation

Müller, Sebastian and Weber, Martin, Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds? (February 19, 2010). Schmalenbach Business Review, Vol. 62, pp. 126-153, April 2010 . Available at SSRN: https://ssrn.com/abstract=1093305

Sebastian Müller (Contact Author)

German Graduate School of Management and Law ( email )

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Heilbronn, 74076
Germany
+49-(0)7131645636861 (Phone)
+49-(0)713164563627 (Fax)

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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