Term of the Day - Flight to Quality

Rahul Gupta (Project Controller ACA MBA(Fin.))   (8004 Points)

28 May 2010  

What Does Flight To Quality Mean?
The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This flight is usually caused by uncertainty in the financial or international markets. However, at other times, this move may be an instance of investors cutting back on the more volatile investments for the conservative ones (i.e. diversifying) without much consideration of the international markets.

For example, during a bear market investors will often move their money out of equities and into government securities and money market funds. Another example is investors moving investments from high-risk countries with political unrest and volatile economic conditions to less risky markets of other countries. One indication of a flight to quality is a dramatic fall of the yield on government securities, which is a result of the increased demand for them.