With the benchmark mid-cap and small-cap indices seeing renewed momentum in the last two months, cash levels in mid-cap funds have reduced significantly.
?Fund managers have got a lot more confident in deploying cash after the the quantitative easing tapering was postponed in September,? said S Krishna Kumar, head, equity, Sundaram MF. Added a senior fund manager from a large fund house: ?Mid caps have done well in recent weeks and it is possible that the upsurge may have resulted in percentage cash levels in mid-cap funds coming down.?
The Federal Open Market Committee (FOMC) had decided to postpone its decision to pull back the Fed?s $85 billion in monthly bond purchases in September, which helped the Indian equity markets stage a smart recovery.
The BSE Midcap and BSE Smallcap indices have risen 14.2% and 13.5% from October till date, beating the returns from large-cap stocks, represented by the 30-share BSE Sensex, which managed to return 9.6% during the same period. Between January and September this year, the mid-cap and small-cap indices had declined 21% and 25%, respectively, even as the Sensex remained flat.
While cash levels in large-cap funds have remained fairly steady at 3-4% throughout the year, fund managers had been increasing their cash levels in mid-cap funds since the beginning of the year.
Cash levels in mid/small-cap funds stood at 3.69% at the end of December 2012. This increased to 5.5% in January, then to 6.9% in June and touched the year’s high of 8.6% in August. However, cash levels declined drastically to 5.1% in October.
According to fund officials, the uncertainty surrounding the QE taper, volatile markets as well as fear of large-scale redemptions had prompted fund managers to steadily raise their cash exposure in mid-cap funds. ?Mid caps face more liquidity constraints than large caps. During extreme selloffs, it can be difficult to sell large portions of mid-cap stocks,? said Dhruva Chatterji, senior investment consultant, Morningstar India.
Experts say high cash levels came in handy in CY13 as fund managers resorted to portfolio shifts and sector rotations during the early part of the year. However, fund managers have now become much more averse to taking cash calls after the bitter experience of 2009, when markets bounced back at a time they were sitting on cash. Average cash levels in mid-cap funds during the last few months of 2008 and the beginning of 2009 were as high as 18-20%.