Flows + Bloat = Headaches for Funds
Goldilocks knows there are problems with being too hot or too cold.
The following article appeared in the February issue of Morningstar FundInvestor.
For most mutual funds, the ideal level of money coming in is a small positive inflow. It gives the managers some money to pursue new ideas with but doesn't force them into significant selling or buying. A high level of inflows or outflows, however, can be very disruptive. At a minimum, it soaks up a big chunk of a manager's day. But the real harm comes if the manager has to trade so much that it causes trading costs to soar or forces a change to the way the fund is managed--or both.
Russel Kinnel has a position in the following securities mentioned above: FAIRX. Find out about Morningstar’s editorial policies.