What Is Fund Flow?
Fund flow is the cash that flows into and out of various financial assets for specific periods of time. It's usually measured on a monthly or quarterly basis.
Fund flow doesn't measure the performance of any single asset but emphasizes how cash is moving. For example, with mutual funds, fund flow measures the cash involved in share purchases or inflows and the cash resulting from share redemptions or outflows. It doesn't say anything about how well or badly a fund performed.
Net inflow occurs when more cash flows into, say, the mutual fund than out of it. A net inflow creates excess cash for managers to invest. Theoretically, this then creates demand for securities such as stocks and bonds. A net outflow would indicate that more cash was taken from the mutual fund than was invested in it.
Key Takeaways
- Fund flows are a reflection of cash that is flowing in and out of financial assets.
- Investors can look at the direction of the cash flows for insights about the health of specific stocks and sectors or the overall market.
- Mutual fund or ETF fund managers with net inflow have more cash to invest, and demand for the underlying assets tends to rise. With net outflows, the opposite is true.
- High net inflow may reflect growing overall investor optimism.
- High net outflow may suggest increasing investor wariness.
Understanding Fund Flow
Investors have a choice of where to allocate their investment capital and normally place it in financial markets that they expect to be profitable. If they then contemplate a downturn in the markets and their investments, they may extract their investment capital and any profits.
This movement of investment capital is the fund flow of cash in the financial markets.
Investors and market analysts watch fund flows to gauge investor sentiment relating to specific asset classes, sectors, or the market as a whole. For instance, net fund flow for bond funds that's negative during a given month by a large amount might signal broad-based pessimism for the fixed-income markets.
Fund flow focuses on the movement of cash only and reflects the net flow after measuring inflows and outflows. Inflows can include the money retail investors put into mutual funds. Outflows can include payments to investors or payments made to a company in exchange for goods and services.
Fund flow does not include any money that is due to be paid. It looks at only actual cash that was paid into or out of the asset.
Investors can find information about fund flow from information aggregators like Morningstar and investment research firms. For example, the Investment Company Institute (ICI) provides estimated fund flows for long-term mutual funds. The latest estimate for July 2022 shows a net outflow of $12.82 billion.
Fund Flow Statements
A fund flow statement discloses the types of inflows and outflows a company experiences.
The fund flow statement can highlight fund flow that might be out of the ordinary, such as a higher-than-expected outflow due to an irregular expense. Further, it often categorizes the various transaction types and sources to help track any fund flow activity changes.
Fund Flow Changes
Broadly speaking, fund flow changes could reflect a change in customer sentiment. This could relate to new product releases or improvements, recent news regarding a company, or shifts in feelings about an industry as a whole.
Positive fund flow changes note an upswing in inflow, a lessening of outflow, or a combination of the two. In contrast, negative fund flow suggests lower inflows, higher outflows, or both.
While occasional shifts may not be cause for concern, repeated instances of negative fund flows can be a worrying sign. For example, it could indicate that income can't meet a company’s expenses. If the trend continues, a company might need a form of debt to continue operating.
Example
According to Morningstar, for March 2022, U.S. long-term mutual funds and exchange traded funds (ETFs) had total inflows of $30 billion. U.S. large-growth funds that typically see redemptions, or outflows, took in $9.3 billion that month.
Still, due to previous months' low inflows, the first quarter of 2022 was the weakest for inflows since first quarter 2020.
Despite a bit of good news, such as for long-term government bond funds, which took in $8.7 billion (a 9.8% one-month growth rate), Morningstar concluded that this low level of inflow reflects softening sentiment and investor caution.
What Does Fund Flow Measure?
Where investing is concerned, it measures only the movement of cash into and out of investments. It does not measure performance.
Why Is Fund Flow Important to Know About?
Many analysts and market watchers believe that fund flow provides a window on investor sentiment and behavior. Some investors use fund flow data to signal when to buy or sell. On the other hand, others use fund flow information to substantiate their investment outlooks before they take action.
Can Fund Flow Predict Market Behavior Reliably?
Not necessarily, although in past years apparently it did a pretty good job. Morningstar has found that net outflows happen even when a market is strong. If fund flow were an accurate indicator, both flow and behavior would probably match more often than they do.
