Complete Finance Blog

After months of enthusiasm for mutual funds, investors are getting queasy–again. For the second week in a row, they’ve pulled more out of funds than they’ve added in. But unlike investors who have been selling individual stocks, a new trickle of outflows can have cascading and negative effects for fund holders.

Mutual funds have mostly resisted the stock selloff of the last two months, but finally seem to be throwing up their hands. For the first time since December, investors have taken more money out of mutual funds than they’ve dropped in, according to data from the Investment Company Institute. In total, they pulled $7.3 billion from equity funds and added almost $2.5 billion in bonds. “The market has been very choppy and people remain very risk averse,” says Kevin McDevitt, a mutual fund analyst at Morningstar.

Months of unnerving headlines, high gas prices and disappointing economic job and home sales have pushed investors over the edge, says Elizabeth Fell, U.S. fixed-income strategist at Barclays’ Wealth, which has in recent weeks reduced its high yield and emerging market debt by 4% and increased cash by about 4%. As of Friday, investor confidence had slipped to a two-year low, according to the Rasmussen Investor Index, which measures the economic confidence of investors on a daily basis. More than half of those surveyed think the economy is getting worse. “Some people are questioning whether the market is a fair game for them,” says McDevitt.

While some investors have turned to lower cost ETFs, outflows from equity funds began several months ago this is just the first time they’ve outpaced total inflows. David Kelly, chief market strategist at J.P. Morgan Funds, estimates that in the last four weeks, more than $17 billion was pulled out of these equity funds, which is more than any one month since May of 2010. The losses confound analysts who are anticipating good earnings at many large U.S. firms. Meanwhile, municipal bond funds have continued to grow as concerns about municipal bonds have eased and investors have become satisfied with the 4% returns.

To be sure, this may be a momentary change, especially if gas prices drop, home prices stabilize and cars return to dealerships as Japan gets back to work. But if it doesn’t, and consumers continue to abandon their stock mutual funds, there are costs to those who stay put. As funds lose assets, they tend raise their expense ratios for the remaining shareholders, says Ethan Anderson — a senior portfolio manager at Rehmann in Grand Rapids, Mich. — making the funds more expensive at a time when they may be losing market value, too. And while there’s rarely a good time for a fund to lose assets, it’s particularly hard in a falling market, because the manager may have to sell stocks before he’s ready in order to meet redemptions.

Still, says J.P. Morgan’s Kelly, those who stay put may be rewarded. “I don’t know where the bottom is, but I do think people are too pessimistic,” he says. “This economic picture is better than people realize.”

Similar Posts:

• How to choose a managed fund – video script
• Overseas retail investors may get to buy stocks directly
• Active Vs Passive Investing
• 3 Places to Hide in the Bond Market
• Some ETFs Boom by Getting Physical