Fund Flow

What Is Fund Flow?

Fund flow is the net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured on a monthly or quarterly basis. The performance of an asset or fund is not taken into account, only share redemptions, or outflows, and share purchases, or inflows. Net inflows create excess cash for managers to invest, which theoretically creates demand for securities such as stocks and bonds.

Key Takeaways

  • Fund flows are a reflection of all the cash that is flowing in and out of a variety 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.
  • When a mutual fund or ETF has higher net inflows, fund managers have more cash to invest, and demand for the underlying assets tends to rise. With increased outflows, the opposite is true.
  • When investors are putting more money into funds, and inflows are higher, that tends to reflect greater overall investor optimism. Greater outflows tend to suggest rising wariness.

Understanding Fund Flow

Investors have a choice in where to allocate their investment capital. Depending on their research and where they expect financial markets to be profitable, they will invest their capital.

Conversely, if they believe that current investments have reached their most profitable point and expect a downturn, they will extract their investment capital and any profits. This movement of investment capital is the fund flows of the financial markets.

Investors and market analysts watch fund flows to gauge investor sentiment within specific asset classes, sectors, or the market as a whole. For instance, if net fund flows for bond funds during a given month are negative by a large amount, this signals broad-based pessimism over the fixed-income markets.

A fund flow focuses on the movement of cash only, reflecting the net movement after examining inflows and outflows of monetary funds. These movements can include payments to investors or payments made to the company in exchange for goods and services.

The fund flow does not include any funds due to be paid but that has not yet been paid. This includes arrangements where a debtor is scheduled to pay a certain amount per completed contract, but the payment has not been received and the obligations on the part of the company have not been settled.

Fund Flow Statements

A fund flow statement is a disclosure of the types of inflows and outflows the company has experienced. It is a forum in which to provide information regarding any fund flow activity 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 activity changes.

Fund Flow Changes

If the fund flow changes, it often reflects a change in customer sentiment. This can be related to new product releases or improvements, recent news regarding the company, or shifts in feelings on the 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 indicative of issues within the company, prolonged negative fund flows can be a sign there are some issues present, as this is a reflection of income not being sufficient to meet the company’s expenses. If this trend continues, it could mean the company needs to acquire a form of debt to continue operations.

Real-World Example

For the year to date ending September 2020, U.S. mutual funds saw total outflows of $317 billion while exchange traded funds (ETFs) saw a total of $313 billion inflows.

For the month ending September 2020, in which the S&P 500 reached an all-time high on Sept. 2, 2020, mutual funds and ETFs saw inflows of $13 billion. Looked at individually, however, mutual funds had outflows of $22 billion while ETFs had inflows of $34 billion.

This indicates that in a year with tenuous market performance, investors are choosing to put their capital in exchange traded funds as opposed to mutual funds. This makes sense in such a year, as ETFs are easier to invest in as they are traded like stocks on an exchange and can cost much less for an entry position.

Article Sources

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  1. Morningstar. "Morningstar Reports U.S. Mutual Fund and Exchange Traded Fund Flows for September 2020" Accessed. Nov. 3, 2020.

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