Question

Hello, I need a simple financial explanation for the below sentence:

Cash flows into MFs investing in stocks are highly correlated with the return on stock markets

Answer 1

There are two aspect in this

1)Cash flow in to MF

Poeple invest their money to enhance thier return,so investor cant manage thier money themself they invest in MFs to get better returns

So main reason why investor invest is to get relativly high return thats why they invest

So MF invest the amount recived in to stock market and according to portfolio managed by fund manager what ever return on thier portfolio given to investor so when let say stock market not perform too well to satisfy investor expectation then investor feels worried and they tends to cash out thier investment to get better returns some were else

Same opposite can happen if stock arket performs MF NAV goes high currwnt MF investor feels safe and confident that they can invest more that increases cash flow in to mutual fund

So based on this fear and greed sentiment of stock market in to medium to longterm that can have impact on MF cash flow

2)Stock market preformance

Every rise or falls happens based on demand supply

If Demand of stock is more thats trive prices of stocks highe so stock market performance improves,whoch makes investor confidnce go highr and they invest more

Same as supply of stocks comes that will drive prices of stocks down and stock market performance down

So investor feels worried they can reduce thier investment based on stockmarket

So by this both correlarion i can say MF cash sflow and stock market returns area highly correlated