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Fund Spy

Flows + Bloat = Headaches for Funds

Goldilocks knows there are problems with being too hot or too cold.

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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.