What is a Flow of Funds?

The term “flow of funds” is used in several different ways in economics, including looking at the movement within individual financial sectors on a national level, tracking mutual fund performance, and determining priorities for bond spending. The meaning intended is typically clear from the context of the discussion. Looking at the flow of funds in all senses can provide important information about economic performance and policy, whether one is looking at national economic activities or those of an individual fund.

In the first sense, the flow of funds is studied and discussed by a nation's central bank, with figures being released shortly after the close of each quarter. Also known as Z.1, these numbers are publicized and include discussions of debt, lending, and investment. People can track the flow of funds over time to examine economic trends, and the numbers from the most recent quarter may be an important indicator of economic health. Economists, analysts, and policymakers all look forward to the flow of funds figure so they can use it in their work.

The second meaning refers to the movement of money in and out of a mutual fund. It is used to track investor interest in the fund by gauging who is investing and how much money they are putting into the fund. It also shows what the fund itself is allocating money to, providing important information about the investment strategy being used by the fund manager. The flow of funds can reveal whether a fund is struggling, and may provide important information about where analysts think the market is headed.

In the sense of a municipal bond, a flow of funds is a statement discussing how the funds raised by the bond will be used. In addition to allocating funds to the project the bond was intended for, the government also needs to set aside money for paying interest and covering other debt service costs. Furthermore, they must save funds and invest them so they can repay the principal on the bond. Different percentages of money can be allocated and a full statement must be provided to show that the municipality is engaging in financial planning to keep the bond repayment on schedule.

In all cases, information about the flow of funds is made publicly available. People can request statements and may also find them published in venues intended to be accessed by members of the general public.