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The performance of household-held mutual funds: evidence from the euro area

Author

Listed:
  • Valerio Della Corte

    (Bank of Italy)

  • Raffaele Santioni

    (Bank of Italy)

Abstract

PMutual funds are a key investment vehicle for households, but past research has questioned the ability of less sophisticated retail investors to optimally select mutual funds. We provide further evidence on this topic by looking at a large sample of mutual funds held by euro-area households from 2009 to 2020. We document that mutual funds with lower participation by institutional investors tend to be more expensive and yield lower risk-adjusted returns, after controlling for many possible predictors of funds’ performance. The underperformance is especially pronounced for equity funds and within-fund over time, meaning that households tend to hold proportionally more funds at times when their risk-adjusted performance is inferior. Running flow-performance regressions, we find that household flows chase past returns rather than risk-adjusted returns and exhibit much stronger inertia than institutional investor flows, which may help explain why they earn lower risk-adjusted returns. Overall, our findings are consistent with models in which individual investors face significant search costs in the mutual funds market.

Suggested Citation

  • Valerio Della Corte & Raffaele Santioni, 2023. "The performance of household-held mutual funds: evidence from the euro area," Temi di discussione (Economic working papers) 1426, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1426_23
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2023/2023-1426/en_tema_1426.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    households finance; investment decisions; retail mutual funds;
    All these keywords.

    JEL classification:

    • G5 - Financial Economics - - Household Finance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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