Mutual Funds See First Net Inflows in More Than 2 Years

Mutual funds in February recorded net inflows for the first time in 27 months, but the positive flows are an outlier to the long-term trend of mutual funds experiencing outflows.

Strong equity market performance and net inflows of $13 billion into mutual funds propelled assets to more than $19 trillion at the end of February, growth of $634 billion in assets, or 3.4%, according to data from Cerulli Associates. The month with mutual fund inflows was the first since November 2021.

“This [February data] doesn’t support a story that mutual funds are going to make a recovery and continue to gather inflows, especially with the amount of industry product development happening in [exchange-traded funds] and separate accounts right now,” says Matt Apkarian, an associate director of product development at Cerulli Associates, by email. “Adviser and investor preferences shifting away from mutual funds toward other vehicles (particularly ETFs) is a continuing strong trend, which we don’t think the mutual fund will reverse.”

Assets held in ETFs increased by $337 billion to new records on flows of $46 billion during February, according to Cerulli’s U.S. Monthly Product Trends data.

Despite the long-term trend of mutual fund outflows, mutual fund assets should remain important for institutions and retirement investors, Cerulli found.

“Mutual funds have some staying power, particularly in workplace retirement accounts, so perhaps the higher flows into equity mutual funds in the first two months of 2024 were due to employer matches, bonuses and employees front-loading their 401(k) contributions,” Apkarian posits.  

Mutual funds had experienced outflows of $78.664 billion in November 2023 and $71.254 billion in December 2023 before experiencing much smaller outflows ($6.277 billion) in January and then turning positive in February, Cerulli data show.  

ETFs and collective investment trusts, investment structure alternatives to mutual funds, maintain advantages over mutual funds, says Ryan Jackson, a manager research analyst at Morningstar.

While one month of net inflows is “a nice reprieve for mutual funds,” he explains, “I don’t know that there’s significant meaning that long-term investors should attach to it. One month of inflows doesn’t change that.”

Although mutual funds gathered inflows in February, “flows [during the month] into ETFs were more than 250% higher than flows into mutual funds for the month,” adds Apkarian.

While U.S. equity, international equity and sector equity each experienced a strong February, collectively gathering $45 billion of net flows, it was alternative ETFs that stole the spotlight, as assets grew $34 billion on nearly $6 billion of net inflows, including investment returns, according to Cerulli.

“If we do continue to see net mutual fund inflows this year, I expect it would be due to [investors] deploying cash from money markets and other cash positions, but this would support both ETFs and mutual funds, with ETFs benefitting the most,” Apkarian says.

Fidelity Investments led inflows to mutual funds in February, gathering $24 billion, while J.P. Morgan was the only other asset manager to experience more than $5 billion of net inflows. American Funds led outflows, seeing $5 billion exit its mutual funds in February.

Fidelity Investments leads recordkeepers in total 401(k) assets, according to the 2023 PLANSPONSOR Recordkeeping survey.