Abstract: Investor sentiment make a better explanation of the sharp fluctuations of the stock market based on the the investor irrationality. Domestic research analysis of the open-end equity funds based on investor sentiment is still blank. In this paper, equity mutual fund flow is used as investor sentiment, and GARCH-M model is applied to analyse the effect of investor sentiment on stock market. Results show that there is positive feedback relations between investor sentiment and stock return.And in a stock market value for classification combination, it can be found that conditional volatility of large cap portfolio becomes higher, expected return become larger; and that conditional volatility of small cap portfolio becomes higher, expected return become smaller. This study makes a contribution for the further development of the indirect indicators of investor sentiment.

Key words: investor sentiment, flow of funds, stock market.