17) Economic Indicators: Mutual Fund Flows

by · October 16, 2010

What It Is

The Mutual Funds Report is released by the Investment Company Institute, a non-profit company for mutual funds with many SEC-registered investment firms. The company also handles bond funds and money markets. The report is a monthly publication, accessible four weeks from the end of the month and during market hours. It covers three types of investment portfolio: money market, stocks, and bonds. Over 8,000 funds—closed-end funds, mutual, UITs (unit investment trusts), and ETFs (exchange-traded funds)—are covered. This is also released in association with the Money Supply Report of the Federal Reserve and data provided by TrimTabs.

Basic Information

Generally, the report reveals the difference between the outflows and inflows over a certain period of time. However, other factors are being considered, such as new sales and exchanges, to provide a more accurate version of the net cash flow. Otherwise, with all things being equal, you will generate a $0 value for the flow. Because of these factors, the figure can either be positive or negative.

Once the country goes back up after recession or any period of slump and the flow of funds increases, it may be taken as a positive sign since investors are putting more money into the stocks.

It may also function very similarly to money market fund, as inflows may mean there are undervalued stocks.

Besides the net cash flow, you can also have a good idea of the stock funds’ cash level average.

How the Report Is Valuable

On a much deeper level it shows you the main sentiment of the investors in the market today. For example, if there is more outflow than inflow then it means the investors may be apprehensive about putting their cash in the market. Moreover, the coverage of the report is very extensive, covering not just the United States but all countries participating in the trade. The average class levels, which are also called the defensive assets, can give you information on the sentiment of the fund managers.

 

The report excludes certain important facts such as the individual shareholders and institutional money, but mutual funds are also a huge contributor in the country’s economy, generating over $10 trillion before 2007 began.

Things to Watch Out For

The report is of limited scope since it only covers mutual funds. There are other types of investment portfolios in the market. It’s also possible to misinterpret the figures that come along with the report. It may even generate the contrarian indicator or a false positive. This happens when investors bring more money into the market with the assumption that the economy is going into a full swing, as indicated by news reports and by the media. However, as soon as the hype dies down, the investments will eventually go down. You may also struggle differentiating secular trends and timing situations.

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