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

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  • Sebastian Müller
  • Martin Weber

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.

Suggested Citation

  • Sebastian Müller & Martin Weber, 2010. "Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds?," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 62(2), pages 126-153, April.
    • Handle: RePEc:sbr:abstra:v:62:y:2010:i:2:p:126-153
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    Cited by:

    1. D’Hondt, Catherine & Elhichou Elmaya, Younes & Petitjean, Mikael, 2021. "Blaming or praising passive ETFs?," LIDAM Discussion Papers LFIN 2021008, Université catholique de Louvain, Louvain Finance (LFIN).
    2. Saeed Ahmad Sabir & Hisham Bin Mohammad & Hanita Binti Kadir Shahar, 2019. "The Role of Overconfidence and Past Investment Experience in Herding Behaviour with a Moderating Effect of Financial Literacy: Evidence from Pakistan Stock Exchange," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(4), pages 480-490, April.
    3. Tomar, Sweta & Kent Baker, H. & Kumar, Satish & Hoffmann, Arvid O.I., 2021. "Psychological determinants of retirement financial planning behavior," Journal of Business Research, Elsevier, vol. 133(C), pages 432-449.
    4. Dumitrescu, Ariadna & Gil-Bazo, Javier, 2018. "Market frictions, investor sophistication, and persistence in mutual fund performance," Journal of Financial Markets, Elsevier, vol. 40(C), pages 40-59.
    5. Oscar A. Stolper & Andreas Walter, 2017. "Financial literacy, financial advice, and financial behavior," Journal of Business Economics, Springer, vol. 87(5), pages 581-643, July.
    6. Mark Grinblatt & Seppo Ikäheimo & Matti Keloharju & Samuli Knüpfer, 2016. "IQ and Mutual Fund Choice," Management Science, INFORMS, vol. 62(4), pages 924-944, April.
    7. Marszk, Adam & Lechman, Ewa, 2021. "Reshaping financial systems: The role of ICT in the diffusion of financial innovations – Recent evidence from European countries," Technological Forecasting and Social Change, Elsevier, vol. 167(C).
    8. Luo, Mancy, 2017. "Essays in financial intermediation and political economy," Other publications TiSEM 146f40d3-6c89-4c6d-8fea-1, Tilburg University, School of Economics and Management.
    9. Thorp, S. & Bateman, H. & Dobrescu, L.I. & Newell, B.R. & Ortmann, A., 2020. "Flicking the switch: Simplifying disclosure to improve retirement plan choices," Journal of Banking & Finance, Elsevier, vol. 121(C).
    10. T. G. Saji & Ratheesh K. Nair, 2017. "Investor-centric strategies for Indian mutual fund industry: inferring from the behavior of individual investors," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 44(3), pages 209-225, September.
    11. Anders Anderson & David T. Robinson, 2018. "Who Feels the Nudge? Knowledge, Self-Awareness and Retirement Savings Decisions," NBER Working Papers 25061, National Bureau of Economic Research, Inc.
    12. Suk Chong Tong, 2018. "Perceived risk and the interplay of expert endorsement, corporate image and investment knowledge in mutual fund advertising," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 23(3), pages 179-189, December.
    13. Iskandar MUDA, 2017. "User Impact of Literacy on Treatment Outcomes Quality Regional Financial Information System," Management Dynamics in the Knowledge Economy, College of Management, National University of Political Studies and Public Administration, vol. 5(2), pages 307-326, June.
    14. Kaufmann, Christine & Weber, Martin, 2013. "Sometimes less is more – The influence of information aggregation on investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 20-33.
    15. Eriksen, Kristoffer W. & Fest, Sebastian & Kvaløy, Ola & Dijk, Oege, 2022. "Fair advice," Journal of Banking & Finance, Elsevier, vol. 143(C).
    16. Bucher-Koenen, Tabea, 2011. "Financial Literacy, Riester Pensions, and Other Private Old Age Provision in Germany," MEA discussion paper series 11250, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    17. Kumari D.A.T, 2020. "The Impact of Financial Literacy on Investment Decisions: With Special Reference to Undergraduates in Western Province, Sri Lanka," Asian Journal of Contemporary Education, Asian Economic and Social Society, vol. 4(2), pages 110-126, December.
    18. D'Hondt, Catherine & Elhichou Elmaya, Younes & Petitjean, Mikael, 2020. "Retail Investing in Passive Exchange Traded Funds," LIDAM Discussion Papers LFIN 2020013, Université catholique de Louvain, Louvain Finance (LFIN).

    More about this item

    Keywords

    Better-than-Average; Financial Literacy; Investor Sophistication; Miscalibration; Mutual Fund Customers; Mutual Funds.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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