Frequently Asked Questions About Mutual Fund Flows

What is mutual fund cash flow?

Net new cash flow refers to the amount of cash either flowing into or out of mutual funds. It is derived by subtracting the redemption of shares from investors’ purchases of mutual fund shares. Included in the calculation is the net amount of exchanges, which occur when shareholders switch money among different funds within the same mutual fund family. Excluded from net new cash flow is the value of shares purchased by shareholders when they reinvest dividends back into their funds. An outflow occurs when the amount of shares redeemed exceeds the amount of new sales and net exchanges of mutual funds. The Investment Company Institute reports mutual fund flows in its monthly Trends in Mutual Fund Investing, the only statistical release on fund flows based on actual industry data rather than estimates.

How does ICI obtain information on mutual fund flows?

Each month, ICI conducts a unique, comprehensive survey of the U.S. mutual fund industry—currently consisting of more than 8,200 mutual funds—to collect and compile the dollar value of investors’ purchases, redemptions, and exchanges of fund shares. Also gathered in the survey are fund assets and certain portfolio investment activities. The report shows cash flows by major fund category—equity, hybrid, bond, and money market—as well as specific investment objectives, such as growth and international.

Annual Net Flow to Mutual Funds
Billions

How is the ICI report used?

Mutual fund companies use ICI’s report to help measure their activities against those of their peers. Members of the media and government agencies, including the U.S. Securities and Exchange Commission and the Federal Reserve, also use ICI statistical research.

How much money flows into mutual funds yearly?

In 2002, $75 billion flowed into mutual funds. For the year, equity mutual funds experienced a net outflow of $27 billion, or 0.9 percent of average assets. Bond funds experienced a record net inflow in 2002 of $140 billion, compared with $88 billion in 2001. Hybrid funds had a net inflow of almost $9 billion and money market funds experienced an outflow of $47 billion. In 1999, net new cash flow to mutual funds totaled $505 billion.

How has cash flow contributed to the growth of mutual fund assets?

Assets of U.S.-based mutual funds grew at an annual rate of 15.5 percent from the beginning of 1990 through the end of 2002. Approximately 62 percent of the growth during the decade was the result of net new cash from investors. Fund performance—asset appreciation plus reinvestment of dividends and capital gains—accounted for nearly a quarter of the growth, and newly reporting funds accounted for the balance.

How much cash flow goes to the retirement market?

Fund shareholders continue to save for their retirement and direct money towards their retirement accounts. As such, the retirement market represents a major part of net new cash flow. Cash flow to mutual funds in retirement accounts was an estimated $114 billion in 2002.

Is cash flow a measure of investors’ total demand for equities?

Mutual fund cash flow does not measure total demand for equities. There is no established correlation between mutual fund flows and stock market activity. Mutual funds own only about 20 percent of the total U.S. equities outstanding. Larger percentages are owned directly by U.S. and foreign individual investors, domestic pension plans, and state government retirement plans. In order to measure total demand, you would need information on the activities of these investors in addition to mutual fund cash flow. Unfortunately, comparable data is not available on non-mutual fund investors.

What are redemptions?

Redemptions occur when mutual fund investors sell back their shares to their fund. Redeeming mutual fund shares is a normal activity for shareholders and is one of the benefits of investing in mutual funds, as the funds provide liquidity to shareholders. By law, mutual funds must stand ready to buy back their shares daily. In 2002, stock fund investors redeemed $880 billion in shares, or about 29 percent of average total net assets.

Redemption Rate of Equity Funds
As a percentage of average total assets

Does a redemption rate reflect how long investors hold their mutual funds?

No. The redemption rate expresses annual equity fund redemptions as a percentage of average assets. It is not a measure of the length of time an account is held. A small number of shareholders can and likely do generate a disproportionate percentage of the total redemptions, thereby masking the activity of the typical investor. Direct evidence is lacking on holding periods of individual investors. The redemption rate does not measure the holding period of the typical fund investor.

How do reinvested dividends affect mutual fund assets?

While they are not included in net new cash flow, reinvested dividends have a positive affect on mutual fund assets. By deciding to reinvest dividends back into their funds, mutual fund shareholders continue to purchase new shares and build assets without adding new cash to the fund. In fact, shareholders reinvested nearly $85 billion of dividends into their accounts in 2002. In 2001, the amount of dividends reinvested was approximately $119.

What happens to fund flows during periods of market volatility?

ICI research indicates that fund shareholders typically are experienced investors with long-term objectives. Mutual fund investors have in the past responded to significant equity market corrections with equanimity, as they have done over the past two years. Investors have not redeemed shares en masse and maintained a long-term perspective. However, during market downturns, mutual fund shareholders typically slow the rate at which they purchase new shares of mutual funds. The largest equity fund outflow in percentage terms since 1945 occurred during and immediately after the 1987 stock market break, yet amounted to only 3.2 percent of the total assets of stock funds. Negative net flows to bond funds have been associated with rising interest rates and negative or low returns on bond funds.

Where can I find more information on mutual fund flows?

More information on mutual fund flows can be obtained at ICI’s website in reports on “Mutual Fund Industry Developments in 2002” and “Mutual Funds and the U.S. Retirement Market in 2002.” The 2003 Mutual Fund Fact Book offers additional data on mutual fund cash flow, assets and shareholder characteristics.

August 2003