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Taking matters into their own hands: How Investors' stock preferences affect mutual fund flows in China

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  • Li, Shi
  • Fu, Rongsha
  • Li, Meng

Abstract

We examine the impact of investors' stock preferences in mutual funds' portfolios on fund flows in China. Our results indicate that mutual funds with an investment style consistent with individual investors' stock preferences have higher fund flow. We find that it affects only individual investors' fund flow, not institutional investors' fund flow. This impact is greater during periods of low economic policy uncertainty or high investor sentiment. Moreover, this impact is reduced with larger fund size or longer fund age. The reasonable explanation is that investors infer fund managers' skills by analyzing the stocks in the fund's portfolio. This explanation is further validated by the results using index funds as the control group. Our findings challenge the assumption that mutual fund investors fully delegate decisions to professionals. Further analysis reveals there is no significant correlation between these preferences and future returns. Our findings contribute to the study of mutual fund investor behavior from a fresh perspective.

Suggested Citation

  • Li, Shi & Fu, Rongsha & Li, Meng, 2024. "Taking matters into their own hands: How Investors' stock preferences affect mutual fund flows in China," Pacific-Basin Finance Journal, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:pacfin:v:88:y:2024:i:c:s0927538x24002890
    DOI: 10.1016/j.pacfin.2024.102537
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    More about this item

    Keywords

    Fund flow; Investor behavior; Fund investment style; Fund manager skill;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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