Investors continue to pull billions from mutual funds, the Wall Street Journal reports, citing the Investment Company Institute. Almost $11 billion flowed out of mutual funds the week ended October 7, as bond, hybrid and domestic equity funds declined. Money market funds have reported outflows this year. Investors continue to be worried about the debt situation in the U.S. and Europe.
Investors are also reacting to extreme volatility which has become the norm. Historically, mutual fund investors bought after significant sell-offs, but housing prices were rising then. The housing price crash that began in 2007 destroyed a lot of wealth. In addition, baby boomers are probably net sellers of risk assets as the transition to retirement. Many younger investors just do not feel comfortable investing in the stock market.
Equity markets may be broken, according to a recent Seeking Alpha post. The post points to macro factors such as sovereign debt crises, misinformation and market manipulation facilitated by the internet, high-frequency trading that has contributed to increased volatility, and leveraged exchange traded funds tied to broad indexes.
Tax-free municipal bond funds have experienced inflows, but investors should not ignore the risks, according to CNNMoney.com. Many state and local governments have done a good job balancing their budgets, but they are not done. They will continue to face tough budget choices and with joblessness the way it is, tax revenues will be weak. Harrisburg, PA recently filed for bankruptcy. A guarantor of municipal bonds in the U.S., Franco-Belgian bank Dexia, was bailed out recently. Also troubling is that investors are moving into lower rated bonds with higher yields. Experts say that buying high yield municipal bonds is imprudent.
Investors should consider that if the yield is attractive, a bond fund is probably taking on too much risk.
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