Impact of investor sentiment on mutual fund risk taking and performance: evidence from China

ABSTRACT

This study provides empirical rationale and guidance for incorporating investor sentiment into mutual fund enterprise information systems. It investigates the effect of fund-specific investor sentiment on fund risk taking and performance. Working on a sample of equity funds in China, our panel regressions reveal that fund risk-taking is negatively related to lagged fund-specific investor sentiment. Investor sentiment is negatively linked to subsequent fund performance, which conforms with the dumb money effect. Encouragingly, there is evidence that mutual fund managers in China possess investing expertise. Fund-specific investor sentiment shows asymmetric impacts. The dumb money effect is primarily driven by positive sentiment.

KEYWORDS:

• Investor sentiment
• mutual fund
• risk taking
• fund performance

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Although throughout the paper we use the term risk-taking strategy, an alternative term would be investing strategy. After all, investing and risk taking are the two sides of the same coin. For example, adjusting the portfolio or deviating from a benchmark is both an investing and risk-managing activity.

2. Due to information disclosure availability, we work with the top 10 share holdings by each fund.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant numbers 71571038 and 71971048]; LiaoNing Revitalization Talents Program in China [grant number XLYC1907015]; and the Fundamental Research Funds for Central Universities in China [grant numbers N2006010 and N160601001].