Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability

Abstract

We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991-2004 equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior.

Keywords: Mutual fund performance, fund cash flows, investor timing, fund clienteles

JEL Classification: G11, G20