The overall cash buffer kept by mutual fund houses rose by 29% in the month of October when debt funds recorded their highest inflow of Rs 1.6 lakh crore in nearly six months.
According to monthly mutual fund tracker of Prime MF database, the overall cash holdings of mutual funds rose by Rs 95,971.58 crore to Rs 4.27 lakh crore. Of the total increase, Rs 6,892.13 crore was added in equity schemes where the total cash holding was at Rs 1.51 lakh crore.
Among the fund houses that increased the most were ICICI Prudential Mutual Fund by Rs 22,566.33 crore, Nippon India Mutual Fund, Axis Mutual Fund, and Aditya Birla Sun Life Mutual Fund where the increase was between Rs 8,391.31 crore and Rs 8,822.20 crore.
A fixed income head of a fund house who did not wish to be quoted pointed out several reasons for the increased cash positions. “October was a very painful month due to the huge pressure in currency and US FOMC hawkish tone which led to a negative market sentiment, we are deploying the money towards 5-10-year G-Secs and 5-10-year corporate bonds,” he said adding that there was good supply during the month.
Anurag Mittal, head of fixed income, UTI mutual noted that inflows often arrive at month-end, but deployment may not be immediate. “Maturity also occurs at month-end and primary transactions take a few days to be recorded, causing a temporary mismatch between incoming funds, maturities, and redeployment,” he said.
Another debt fund manager said, that the market was quite nervous then as yields trended upwards and there was uncertainty about whether the RBI would support, which is why mutual funds chose to hold more cash in their portfolios.
In its October fact sheet Axis Mutual Fund noted said that its believes that the best of the duration play is behind us. “Given that inflation expectations remain well within the central bank’s target range, we foresee a “lower for longer” interest rate environment,” it said.
It added: “We have been focused on the short term 2–5-year corporate bonds in the portfolio as we expect surplus banking liquidity, lower supply of corporate bonds/ CDs due to slowdown and delay in implementation of LCR guidelines and attractive spreads and valuations. Incrementally short bonds can outperform long bonds from risk-reward perspective due to a shallow rate cut cycle, lower OMO purchases in the second half of the year and a shift in focus to Govt Debt to GDP targets.”
Meanwhile, in equities, cash holdings rose after falling for two consecutive months. The most sold stocks were Bharti Airtel, Axis Bank, Tata Motors Passenger Vehicles, and Coal India and mutual funds most increased their holdings in LG Electronics, ITC, ICICI Bank, and Adani Power.
