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

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  • Sebastian Müller
  • Martin Weber
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    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.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 62 (2010)
    Issue (Month): 2 (April)
    Pages: 126-153

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    Handle: RePEc:sbr:abstra:v:62:y:2010:i:2:p:126-153

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    Related research

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

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    Cited by:
    1. 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.
    2. 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.

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