What Information Do Investors Care About? Evidence in the Korean Mutual Fund Market

Abstract

We investigate the factors influencing investors' decision-making in the Korean mutual fund market. Our findings indicate that investors prioritize simple signals when allocating capital to mutual funds, such as excess returns on benchmarks designated by fund rating companies or market indices like KOSPI and KOSPI200. Conversely, investors are less inclined to use sophisticated asset pricing models, including the CAPM (Capital Asset Pricing Model), Fama and French (1993) Three-factor model, and Carhart (1997) Four-factor model. Notably, institutional investors are more likely than retail investors to utilize these asset pricing models when selecting mutual funds. Our results remain robust even when accounting for observations following the Global Financial Crisis (GFC), extreme returns, and changes in fund ratings provided by rating agencies. Furthermore, we demonstrate that the weighting of time-series fund flow-performance sensitivity does not affect our conclusions. Our research suggests that in Korea's mutual fund market, investors tend to rely on straightforward indicators rather than the complex pricing models proposed by earlier studies. Importantly, our results suggest that this preference for simple indicators among retail investors is not unique to any specific country. We conclude that retail investors generally lack the level of financial literacy required to effectively use risk-adjusted performance measures.