The performance of household-held mutual funds: evidence from the euro area

Valerio Della Corte () and Raffaele Santioni ()
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Valerio Della Corte: Bank of Italy
Raffaele Santioni: Bank of Italy

No 1426, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: PMutual funds are a key investment vehicle for households, but past research has questioned the ability of less sophisticated retail investors to optimally select mutual funds. We provide further evidence on this topic by looking at a large sample of mutual funds held by euro-area households from 2009 to 2020. We document that mutual funds with lower participation by institutional investors tend to be more expensive and yield lower risk-adjusted returns, after controlling for many possible predictors of funds’ performance. The underperformance is especially pronounced for equity funds and within-fund over time, meaning that households tend to hold proportionally more funds at times when their risk-adjusted performance is inferior. Running flow-performance regressions, we find that household flows chase past returns rather than risk-adjusted returns and exhibit much stronger inertia than institutional investor flows, which may help explain why they earn lower risk-adjusted returns. Overall, our findings are consistent with models in which individual investors face significant search costs in the mutual funds market.

Keywords: households finance; investment decisions; retail mutual funds (search for similar items in EconPapers)
JEL-codes: G14 G23 G5 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-eec, nep-eur and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1426_23

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