A Study of Net Inflows to Growth Mutual Funds
Purpose: To attempt to discover a relationship between net sales of growth mutual funds and other variables in the macroeconomy.
The paper first examines three theories, as put forth by: Classical economists; J.M. Keynes; and a mutual fund company,
about the motivations of individuals for saving money. Then, the focus turns to fund sales data to see if any of the theories match what investors actually do.
The three theories: Classical economics states that as the interest rate increases, people will save more. Thus, the rate of saving acts as a function of
the current interest rate. Keynesian theory relates the rate of savings to the income of individuals. Savings will vary with their income.
The mutual fund company advocates that people should invest with their company based on long-term goals, without regard for either current interest rates or current income.
Thus, if investors follow the mutual fund company philosophy, the rate of savings should have no relationship to other macroeconomic variables.
Variables examined and method used: The dependent variable under study is net sales (corrected for inflation) of growth mutual funds.
Independent variables tried fall into various category groups: measures of GNP (as a reflection of income); bond yields (representing interest rate measures);
government expenditure measurements (seeking a connection between government involvement in the economy and individual saving rates); and market measures
(examining the connection between rate of return and individual savings rates). As tools, the paper uses multiple linear regression with graphs of appropriate data.
Results and interpretation: The regression model with the highest R squared, after correcting for autocorrelation, shows that the only significant
predictor variables affecting the dependent variable (net sales of growth mutual funds) are: a measure of real GNP; and a growth mutual fund index
lagged by one year. The equation shows that as real GNP goes up $1 billion, net sales of growth mutual funds declines by $4.95 million, and as the
growth index from the current year increases one point, net sales of growth mutual funds will increase $6.51 million in the next year.
Implications for the three theories: If the classical model holds true, one should expect to find increases in rates of return leading people
to save more money. In terms of the data, the growth fund index should have served as a reliable predictor for net sales. The growth index
lagged one year did prove to be a significant predictor. This shows that some relation exists between the rate of return funds provide now and the
amount of money people will put in them next year. If Keynes theories prove true, one should expect to see the amount people save increase as income
(GNP) goes up. The data show that GNP is a predictor of net flows into growth mutual funds, but in the opposite direction that Keynes predicted.
If investors follow the advice of the mutual fund company, one should find that no variable of the macroeconomic model would have any connection with net flows
into growth funds. That did not hold true, as already seen. Not all investors follow the "life-cycle" hypothesis of people saving based on long-term goals.
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