Mutual funds, over the past few years, have gained considerable popularity among many new investors owing to their potential to yield high returns as well as diversify investments. One important parameter that impacts the mutual funds’ performance is the funds’ flow. The funds’ inflow and outflow in mutual fund schemes tend to have both long-term and short-term impacts on their thorough performance. Discussed here are the distinct dimension of the fund flows as well as their implications.
Impact of fund flow in mutual funds
Impact on performance over the short-term
Over the short term, the funds’ inflow and outflow can impact the mutual funds’ performance. During periods of high fund inflow, mutual fund managers witness the challenge of positioning excess funds effectively to enhance returns. If the mutual fund manager is not able to invest in mutual fund, it can lead to dilution and suboptimal performance of the prevailing holdings. Likewise, sudden fund outflow may propel the mutual fund manager to sell securities for meeting the redemption requests, which disrupts the investment portfolio and returns potentially.
Market impact
The flow of the fund even directly impacts the underlying securities in the fund’s investment portfolio. In the case of considerable inflows, the mutual fund managers might need to position the funds quickly, resulting in enhanced securities’ demand. This enhanced demand can impact the underlying securities’ prices, leading to upward price movement. In contrast, large-scale outflows create selling pressure. This leads to a downward price movement.
Impact on performance over the long-term
Over the long term, the mutual funds’ performance is determined by parameters such as portfolio composition, investment strategy, and fund manager’s expertise. So, it is crucial to select funds with consistent performance and a strong investment procedure instead of being swayed by fund flows.
Efficiency and fund size
Mutual funds size can even be impacted by the flow of funds. As more retail investors invest money into a mutual fund scheme, its size enhances. Note that efficient management of bigger funds can be challenging for fund managers. A fund that grows rapidly might find it difficult to figure out attractive investment opportunities and maintain the required diversification level. Thus, you must consider the size of the fund before beginning your investment. Ensure the fund size is relative to its goal and even assess if the fund manager has the potential to manage bigger asset base effectively.
Investor behaviour
Retail investors, especially the new ones play a crucial role in deciding the fund flows. Investor behaviour like panic selling during falling markets or following the herd mentality, can result in suboptimal decisions. It is necessary for you as an investor to concentrate on your investment goals, and risk appetite level and take up a disciplined approach instead of reacting impulsively due to short-term fund flows in the market.
Conclusion
Impact of the fund flow on the performance of mutual fund schemes is an essential aspect to consider. While the short-term flow of funds can result in volatility and impact schemes’ performance, it is important to concentrate on the long-term growth of the fund. Parameters such as investment strategy, fund manager’s expertise and portfolio composition must be given high weightage when making an investment decision. By understanding the dynamics of the fund flow and making an informed decision, you as an investor can navigate the mutual fund vertical with great confidence and enhance your chances of attaining your life goals by the estimated investment horizon.
