The turn-of-the-year effect in mutual fund flows

Abstract

The seasonal regularity in cash flows to mutual funds remains a puzzle. In line with Choi (J Appl Bus Res 31(2):715-726, 2015), who observes the seasonality in cash flows in the U.S. domestic mutual fund industry, we find that the month of January is characterized by the highest net flows, and December, the lowest. Considering that mutual fund traders usually implement their investment decisions during the turn-of-the-year period, this study investigates the potential causes of this seasonal regularity. The seasonal component of investors' asset-allocation decisions is not associated with the seasonal variations in personal income growth and consumption growth. Instead, the tax treatment of the distribution from mutual funds is likely to drive this seasonal pattern. We also find strong evidence that past performance affects the seasonality in the cash flows of equity funds. The "January effect" in the inflow to mutual funds is stronger for the funds with higher past performance. Interestingly, investors are not sensitive to the past performance when they buy style funds, but they sell the funds with poorly performed styles at the turn of the year.