Investors move money into and out of investments for a variety of reasons. Net fund flow is the amount of money entering a fund minus any money leaving in a fixed period of time.
Stock buyers interested in owning a variety of shares are faced with a choice: They can either buy shares directly by themselves or own shares through a mutual fund. If an investor is not sure exactly what to buy and in what amounts, a mutual fund makes the process easier.
When you buy a mutual fund you don’t buy the stock but instead buy shares in the fund. Those shares reflect a proportionate ownership of the underlying stocks and other investments that the fund’s managers deem important.
That movement of money away from a fund is called a redemption. The investors seek to redeem their fund shares for cash. The fund’s managers must raise cash to send to investors departing the fund.
Fund managers typically have a set amount of cash on hand for redemptions. If the amount sought by investors exceeds the cash available the fund must sell shares in order to find the cash needed.
On a monthly and quarterly basis funds report how much money is sought through redemptions and how many new dollars enter the fund via new investors or new cash from existing investors.
The resulting number is called net fund flow. A fund with an overwhelming number of redemptions could find itself under pressure to sell investments to meet that demand. This results in a negative net fund flow.
Likewise, a fund might see an increase in investors interested in their performance or reputation, or simply broad investor interest in stocks. That could result in a positive net fund flow for the period.
Investors should not see a negative net fund flow as a signal that people have lost faith in the ability of a given fund’s management. Many times shareholders must raise cash for other reasons, such as needing to pay for living expenses in retirement.
Usually, too, incoming funds can serve to offset redemptions, resulting in narrowly negative, flat or slightly positive net fund flows.
However, if a fund experiences steady and prolonged negative net fund flows, that could be a bad sign. A rapid spike in redemptions is another, more serious red flag and should be scrutinized carefully.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.