Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds?
2-2010 MÄuller and Weber (University of Mannheim
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We establish a significant positive relation between financial literacy and the likelihood of relying on passive funds, indicating that low financial expertise is indeed one explanation for the actively managed fund puzzle. However, this is not the whole story.
Even very sophisticated investors overwhelmingly select active funds despite being very aware of less expensive ETF and index fund alternatives. Additionally, although more sophisticated investors are capable of giving more precise management fee estimates, they do not minimize fees...
However, our results suggest that the level of financial literacy is not related to the performance of the actively managed funds that our participants selected. In contrast, overconfidence might prevent investors from investing passively. We find a positive relation between the belief of being better than average in identifying superior investments and the likelihood of buying an active fund.” Click here to read the original paper.
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