Definition: Mutual fund flows, which are usually called "fund flows," indicate how investors are investing their money in mutual funds. The flows are measures of dollars flowing into or out of mutual funds.
Economic Indicators: What Fund Flows Mean
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 reason fund flows often provide insights into the future of the economy is because they may reflect investor sentiment (feelings) about the economy. If investors, as a whole, are positive about the economy they tend to put more dollars into their mutual funds. Likewise, if fund flows are negative, investors generally have negative feelings about the economy.
At times, however, strong fund flows can indicate the opposite: In strong economies, investors put more dollars into their 401(k)'s and mutual fund accounts. Therefore an economic peak is often marked by extremely positive fund flows. The bottom point of an economic recession may be marked by extremely negative fund flows. For this reason, fund flows are, at times, considered contrarian indicators.