Tony has to figure out which companies to sell to meet redemptions and which companies to keep. Because Tony's is forced to sell companies when he may not want to, he has trouble controlling capital gains taxes. Tony's fund does worse and worse, more investors bail out, and there's nothing Tony can do about it. Tony was burned by hot money, one of the most serious problems a fund manager has to contend with. All mutual funds like to see their assets swell, and most funds can handle inflows of investor money if the money comes in slowly and steadily.
Problems arise when a fund is hit with big dollar amounts suddenly.
We looked at factors such as a fund's recent performance, whether a fund has a redemption fee, its availability on no-transaction networks, and more. The Hot Money Index goes from 1-5. A Hot Money Index of 5 means a fund is doing everything they can to attract new money, and that performance may suffer because of it. We're not saying that a fund definitely wont perform well if it has a high Hot Money Index - some funds can handle hot money better than other ones can. We can say that a fund with a low Hot Money Index has a much better chance of performing will than a fund with a high Hot Money Index.