Smart Money Effect In Mutual Funds

The Purpose of this research is to evaluate the ability of mutual funds investors to forecast the performance of mutual funds and selecting the best performed funds. It should be mentioned that both individual and institutional investors have been evaluated in this study. In order to answer the question whether the investors have the ability to forecast the performance of mutual funds or not, we have gathered 40 Iranian mutual funds data that are founded and active in Tehran stock exchange market. Time period of this assessment data is 36 months, from the beginning of March 2011 to the end of March 2014. We have constructed two portfolios of new money. The first portfolio consists of all funds with a positive net cash flow. The second portfolio comprises all funds with a negative net cash flow. Next, we estimate the performance of each of the portfolios using both the Fama-French’s (1993) model and the Carhart’s (1997) model including a momentum factor. The result of using the mentioned models showed that investors are unable to select the appropriate fund, also there is not a significant difference between the ability of individual and institutional investors for selecting the best performed funds.