June was a positive month for mutual funds and a possible clue on the future of our economy. How do we know? Look no further than fund flows, which are a measure of how much investor dollars are flowing in or flowing out of mutual funds. So how do the fund flows look for the previous month and what might they be telling us now?
According to Lipper research, the 2011 second quarter had net inflows of roughly $13 billion, which means investors put more money into mutual funds than they took out. What do fund flows tell us? Consider this excerpt from your trusty About.com Mutual Funds Glossary:
Some investors use fund flows as a leading economic indicator, which means that clues about which direction the economy may be heading in the near future can be obtained by observing how mutual fund investors are investing today. If, for example, fund flows are positive--more dollars are flowing into mutual funds than flowing out--investors may consider this a sign that the economy is heading in a positive direction in the near future.
The fundamental theory is that mutual fund investors tend to put more money into their mutual funds and 401(k)'s when they feel good about near-future economic conditions. Investors are also consumers and consumer spending is more than two-thirds of our economy. Economists have noted that when investors feel positive about the future, they also spend money on consumer goods and, hence, investing in mutual funds can mean more consumer purchases.
Be warned, however, that fund flows don't guarantee anything. At this juncture, we may be a bit more positive about near-future expectations than, say, this time last month but don't bet the farm on this temporary good news. In fact, extreme flows have signaled market tops (extreme inflows) and market bottoms (extreme outflows).
In summary don't react to (or invest based solely upon) what the investor herd is doing but human behavior can be interesting to watch from a distance!