Dynamic Relationship Among International Mutual Fund Flows and Stock Market: Facts from a Natural Research In the Indian Mutual Funds Industry

The Impact of Mutual Fund Flows on Stock Market and Investor Sentiment

Abstract

We use mutual fund flows as a measure of individual investor sentimentfor different stocks, and find that high sentiment predicts low future returns.Fund flows are dumb money–by reallocating across different mutual funds, retailinvestors reduce their wealth in the long run. This dumb money effect isrelated to the value effect: high sentiment stocks tend to be growth stocks.High sentiment also is associated with high corporate issuance, interpretableas companies increasing the supply of shares in response to investor demand.