Markets in India are trading near their peak but apparently retail investors are not enthused about it. Retail participation in the market has fallen to 10-Year low in 2013. Despite staying invested for more than 5 years now, many of them are yet to see any meaningful returns; thus they are exiting equities on every rally. Investors are pulling out money even from equity oriented mutual funds. This shows that they have lost confidence in equities and expect markets to stay dull for sustained time. It is interesting to know what view equity oriented mutual funds hold about the market since they are considered ideal for long term investors.

The simplest way to know the view of mutual funds on the market is to analyse their investment pattern and see the weightage of cash and equivalent assets in the portfolio. From the beginning of the Financial Year (FY) 2013-14; markets have rallied around 9% so far but with lot of interim volatility. It is evident from the below given graph that after 4 consecutive months of bad performance, CNX Nifty rebounded in September and returns got accelerated in October thanks to upbeat global sentiment. Now that markets hover near their all-time high, taking directional call has become difficult.
 

Market performance...

Returns are absolute
NAV Data: October 21, 2013
# Month to date
(Source: ACE MF, PersonalFN Research)

How mutual funds have reacted?

At present, mutual funds are divided. Few of them have raised cash component while others have reduced it. There are also a few players who have largely kept weightage of cash unchanged in the portfolio over last few months when markets rallied. It is noteworthy that smaller as well as newer fund houses have relied on taking active cash calls.
 

Fund houses that are raising cash positions...

	Cash and equivalents (as a % of AUM)
Mutual Fund House	Sept	Aug	Jul	Jun	May	Apr
Pramerica Asset Managers Private Limited	12.8	5.7	11.7	6.3	2.6	4.2
IDFC Asset Management Company Limited	12.1	4.2	6.5	6.8	5.0	4.7
Canara Robeco Asset Management Company Limited	9.6	10.6	8.3	6.8	3.5	5.8
IDBI Asset Management Ltd.	6.1	1.4	1.5	1.1	2.2	1.0
HSBC Global Asset Management (India) Private Limited	4.8	3.3	3.1	3.0	3.2	1.8

Only equity oriented schemes are considered
(ACE MF, PersonalFN Research)

Table above lists fund houses that have been increasing cash component whenever markets rally. Although it would be imprudent to conclude that these fund houses are bearish on markets; it is clear that they have adopted cautious approach and they might be expecting markets to give up gains.
 

And those who have reduced weightage of cash and equivalent assets...

	Cash and equivalents (as a % of AUM)
Mutual Fund House	Sept	Aug	Jul	Jun	May	Apr
Quantum Asset Management Company Private Limited	13.1	11.8	15.8	20.9	20.1	18.3
Sahara Asset Management Company Private Limited	6.2	10.4	9.9	8.5	10.7	10.4
PineBridge Investments Asset Management Company (India) Private Limited	2.9	1.8	1.2	9.4	5.1	9.4
Birla Sunlife Asset Management Company Limited	2.9	3.5	5.4	3.7	3.3	4.9
Mirae Asset Global Investment Management (India) Private Limited	0.9	1.2	3.0	3.0	2.4	3.4

Only equity oriented schemes are considered
(ACE MF, PersonalFN Research)

Whereas, some fund houses have been buying on dips as their cash component has been reducing on every market fall. The list also includes Quantum Mutual Fund which appears to be cautious about overall market movement but has been deploying its cash whenever markets fall. Again, this is doesn't mean fund houses featured in the above given table hold bullish view on the market. But it appears that, they are somewhat optimistic about durability of market rallies.

It is noteworthy that there have been about 15 fund houses whose cash position has remained almost the same over last two quarters. Most of them hold less than 5% of their assets in cash and equivalents. The list includes some prominent fund houses such as HDFC Mutual Fund, SBI Mutual Fund, UTI Mutual Funds and Franklin Templeton Mutual Fund among others. Usually fund houses prefer to stay invested to avoid going wrong on directional calls.

Fund houses showing alike cash allocations however show remarkable difference in performance. Among those showing rising allocation to cash and equivalents, only Canara Robeco Mutual Fund and IDFC Mutual Fund have some of top performing funds under their management. The same is true for Quantum Mutual Fund. HDFC Mutual Fund and Franklin Templeton Mutual Fund run some of the legendary mutual fund schemes.

PersonalFN is of the view that, cash positions of a fund houses can't be a criterion for investing or not investing in a fund. A fund house that has a dependable record, one that follows investment processes and systems should be preferred. Moreover, while you select a particular scheme for your portfolio; you must keep in mind your objectives. Moreover, PersonalFN is of the view that, more than a directional call what plays a significant role in generating competitive returns is stock selection and focus on long term. Those fund houses which have maintained consistency in their portfolio strategies and have implemented sound risk management processes have managed to generate superior returns for their investors.

As an investor, your focus should remain on your long term goals such as retirement. Instead of bothering about the direction of the market, you would be better off selecting a fund that will help you achieve your goals.
 

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