Working Paper: NBER ID: w14583
Authors: Zoran Ivkovich; Scott Weisbenner
Abstract: This paper studies the relation between individuals' mutual fund flows and fund characteristics, establishing three key results. First, consistent with tax motivations, individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losing funds. Second, individuals pay attention to investment costs as redemption decisions are sensitive to both expense ratios and loads. Third, individuals' fund-level inflows and outflows are sensitive to performance, but in different ways. Inflows are related only to "relative" performance, suggesting that new money chases the best performers in an objective. Outflows are related only to "absolute" fund performance, the relevant benchmark for taxes.
Keywords: mutual fund flows; individual investor; portfolio choice; tax-motivated trading
JEL Codes: C41; D14; G11; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past fund performance (G17) | likelihood of selling mutual funds (G23) |
| tax motivations (H20) | likelihood of selling mutual funds (G23) |
| investment costs (G31) | likelihood of selling mutual funds (G23) |
| fund turnover (G11) | probability of sale in taxable accounts (G19) |
| capital gains overhang (G31) | probability of sale in taxable accounts (G19) |
| relative performance (P17) | inflows (F21) |
| absolute performance (P17) | outflows (F32) |
| higher expense ratios (G32) | likelihood of selling mutual funds (G23) |