Essays on retail investors’ mutual fund flows

This dissertation examines policyholder and mutual fund investor behavior in unit linked investmenttype policies through three connected essays. The first essay shows that positive returns significantly reduce termination rates, suggesting that previously studied models in actuarial science are insufficient for explaining policyholder behavior in unit-linked policies. The second essay analyzes mutual fund withdrawals relative to the fund’s holding period return. The results reveal a downward V-shaped relationship between selling rates and returns, with withdrawal rates peaking near zero returns and decreasing as returns move further from zero. We explain the results through a prospect theory-based model. The third essay studies how individual investor actions impact mutual fund flows. The essay finds reallocations between funds, rather than new inflows or terminations, primarily drive the flow–performance relationship. The reallocations out of funds increase with fund performance, but the money is reallocated mainly to other high-performing funds. We also find asymmetry between withdrawal and investment decisions: an unadjusted 12-month return or a cross-sectional ranking based on it mainly explains fund inflows, while outflows are also explained by holding period returns. The findings suggest that common monotonic learning models are insufficient in explaining mutual fund flows.