Abstract
This paper empirically examines the relationship between different classes of mutual funds, measures of investors' expectations and business cycle movements in the BRICS markets over the 1996Q1-2017Q3 period. Applying the Panel Vector Autoregressive (PVAR) model in a Generalized Method of Moments (GMM) setting, the results suggest a strong causal relationship between mutual fund flows and measures of investors' future expectations. In particular, fund flows are forward-looking and assist in forecasting real economic conditions. Moreover, investors choose to invest in riskier funds when economic conditions are good, while they prefer safer options in poor economic situations. These findings have important implications for international diversification.