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


  • Sebastian Müller
  • Martin Weber


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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    References listed on IDEAS

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    4. 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.
    5. 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.
    6. 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.

    More about this item


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

    JEL classification:

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


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