Cash levels of equity mutual funds have risen in the previous calendar year amid volatility in the markets and rich valuations of Indian shares.
Cash levels as a percentage of total equity assets rose to 4.9% at the end of 2022, compared with 4.2% in the year before. Nine fund houses had cash levels of over 5%, with PPFAS topping the list, with 14.4% of its equity assets being held in cash. The fund house has seen sizable inflows last year and may have been unable to deploy a portion of it due to rich valuations and the cap on overseas investment imposed by the regulator.
Among larger fund houses, Axis MF (6.7%), ICICI Prudential MF (5.5%) and HDFC MF (3.38%) had significant cash in percentage and value terms.
Thirty four equity schemes held cash in excess of 10% of their assets. This included mostly thematic and mid- and small-cap schemes. Overall, 44% or 253 of the 570 equity schemes saw their cash holdings rise in the past year, data from Value Research show.
“We remain reasonably invested across chosen businesses with cash levels having broadly remained around 3-5%. We believe in adhering to the investment process through various market phases to eliminate noise and back our convictions. While geopolitical events and their ramifications could create volatility and short-term underperformance or outperformance in funds based on their positioning, we constantly keep assessing if the structural investment thesis remains intact. History has revealed that on most occasions, such volatility does provide good entry points to add positions in several high-quality businesses,” said Ravi Gopalakrishnan, CIO – equity, Sundaram Mutual Fund.
Equity schemes saw inflows of Rs 1.61 trillion last year despite market volatility and bouts of correction. This was on the back of steady flows by way of SIPs averaging more than Rs 12,500 crore per month.
“Equity schemes, in general, have not been taking too many cash calls in the past few years. It is expected that investors and advisors will do their asset allocation before investing in such schemes,” said Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India.
Cash calls also depend on the type of schemes under consideration. Mid- and small-cap schemes, for instance, may have higher cash holdings compared with largecap schemes as these are less liquid and high cash may prove useful during market corrections and large redemptions, said Kapadia.
The decision to increase cash goes against the fundamental tenet of staying invested at all times, but is employed either to protect the downside in the event the market falls or to avoid paying a high price for a stock. Most equity schemes don’t typically take active cash calls on the assumption that investors have done their asset allocation and want to remain fully invested.
Taking large cash calls backfired in the past. Fund managers sitting on high cash in 2008, for instance, were caught off guard when the markets rebounded in 2009.