Professor Douglas Cumming is Professor of Finance and Entrepreneurship at the Schulich School of Business, York University, Ontario.
Using a sample of mutual funds that invest exclusively in the U.S., we distinguish between different types of mutual fund inflows and outflows: switches, pre-authorised contributions, systematic withdrawal plans, reinvestments, and distributions to unit-holders.
We find that different types of flows exhibit distinct characteristics to aggregate fund flow with respect to fund fees and past performance, suggesting that an aggregation of different types of flow in any form, as done to different degrees in all prior studies on mutual fund flow, gives rise to miss-estimates of economic and statistical significance of factors that influence flow.
We further argue that the positive correlation between new purchases and switch-out reflects information asymmetry between incoming investors and current unitholders.
This information asymmetry is more common when fund series are sold through dealers or brokers.
We further show that this information asymmetry, attributed to biased purchase advice, is negatively associated with fund performance.