Do retail mutual fund investments represent “dumb money”?

• Main Authors: Sunderarajan Sourirajan, Subhashree Natarajan
• Format: Article
• Language: English
• Published: Elsevier 2021-03-01
• Series: IIMB Management Review
• Subjects: Dumb money; Net fund flows; Demonetisation; Momentum; Distribution channel; Money weighted return
• Online Access: http://www.sciencedirect.com/science/article/pii/S0970389621000197

This paper highlights the “dumb money” effect of Indian retail mutual fund investors who chase funds that subsequently underperform. Retail investors show twice the propensity to chase top past performers; their cash flows are strongly negatively correlated to contemporaneous market returns indicating a contrarian, rather than a “buy and hold” strategy. They make up to 1.3% less in terms of raw returns compared to institutional investors, and the gap is accentuated for funds with superior risk adjusted returns. Collectively, the results reveal that retail investors trade actively with poor timing and fund selection skills despite having access to professional fund management.