Impact of investor sentiment on mutual fund risk taking and performance: evidence from China

This study provides empirical rationale and guidance for incorporating investor sentiment into mutual fund enterprise information systems. It investigates the effect of fund-specific investor sentiment on fund risk taking and performance. Working on a sample of equity funds in China, our panel regressions reveal that fund risk-taking is negatively related to lagged fund-specific investor sentiment. Investor sentiment is negatively linked to subsequent fund performance, which conforms with the dumb money effect. Encouragingly, there is evidence that mutual fund managers in China possess investing expertise. Fund-specific investor sentiment shows asymmetric impacts. The dumb money effect is primarily driven by positive sentiment.