FUND FLOW VERSUS CASH FLOW
DEFINITION of ‘Fund Flow’
The net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured on a monthly or quarterly basis. The performance of an asset or fund is not taken into account, only share redemptions (outflows) and share purchases (inflows).
Net inflows create excess cash for managers to invest, which theoretically creates demand for securities such as stocks and bonds.
INVESTOPEDIA EXPLAINS ‘Fund Flow’
Investors and market analysts watch fund flows to gauge investor sentiment within specific asset classes, sectors, or for the market as a whole. For instance, if net fund flows for bonds funds during a given month is negative by a large amount, this would signal broad-based pessimism over the fixed-income markets.
What is the difference between cash flow and fund flow?
Companies receive inflows of cash revenue from selling goods, providing services, selling assets, earning interest on investments, rent, taking out loans or issuing new shares. Cash outflows can result from making purchases, paying back loans, expanding operations, paying salaries or distributing dividends.
Since the Securities and Exchange Commission (SEC) requires all listed companies to use accrual accounting – which largely ignores the actual balance of cash on hand – investors and lenders rely on the statement of cash flow to evaluate a company’s liquidity and cash flow management. It is a more reliable tool than metrics companies use to dress up their earnings, such as earnings before interest, taxes, depreciation and amortization EBITDA.
The statement of fund flow was primarily used by accountants to report any change in a company’s net working capital during a set period of time. Much of this information is captured in the statement of cash flow.
The investing use of fund flow is more useful today. Here, overall investor sentiment can be gauged as it relates to different asset classes. If the flow of funds for equities is positive, for example, it suggests that investors have a generally optimistic view of the economy (or at least the short-term profitability of listed companies).