Research On Mutual Fund Investor Timing Ability In China

Since its first mutual fund set up in 2001, the mutual fund market in China has kept in rapid growth, for the fund innovation and the flexible purchase and redemption mechanism have attracted more and more investors, especially individuals. Mutual fund investors can enhance their returns by selecting superior funds, advantageously timing their cash flows to the fund, or both. Yet gains from a good-performing fund may be offset by poor timing, and thus are less than gains from a buy-and-hold strategy. Despite its rapid development, the mutual fund market in China is still imperfect. With more and more individual investors attend the market, investors'lacks of investment experience and stability have appeared. However, among the few current studies on mutual fund investor timing ability, none of them concentrated on investors in China. Under this condition, research on mutual fund investor timing ability in China is of practical significance.This paper defines mutual fund investor timing ability as the comprehensive ability to predict the market trend and the corresponding change of specific funds. It is reflected through allocation among funds, namely increasing fund shareholding before it goes up and decreasing before it goes down.Based on reviews of literatures on mutual fund investor timing ability, this paper adopts performance gap as a microeconomic index to investigate whether investors exhibit timing ability and what factors would affect such ability. It is also a comparison between investor timing and buy-and-hold strategy. After statistical analysis of the performance gap classified by fund type and period, this paper analyzes the influencing factors of the performance gap, such as individual investors' fund shareholding proportion. It also sheds some light on the different investor timing decisions before and during the financial crisis. Empirical results show that mutual fund investors in China, as a whole, don't reveal timing ability, and irrational timing behavior is detrimental to their gains. Fund age, fund selectivity and shareholding proportion of individual investors significantly influence the performance gap, and thus the investor timing ability. According to the results and the reality of China's mutual fund market, this paper proposes suggestions of restricting irrational timing and stabilizing market.