Mutual Funds Holding More Cash. Is It A Sign Of Worry?
Dec 07, 2018

Author: PersonalFN Content & Research Team

Fund managers of nearly 50 equity mutual fund schemes seem concerned about the future of Indian equities.

As per the portfolio disclosures on October 30, 2018, out of 355 that PersonalFN analysed, approximately 50 equity mutual fund schemes held more than 20% of their portfolio in cash and equivalent assets.

Table: High cash holdings: a red flag?

It seems these select mutual fund houses have taken huge cash calls across their scheme offerings. Particularly the schemes launched recently such as IDBI Banking & Financial Services Fund, IDBI Long Term Value Fund, Tata Multicap Fund, Invesco India Smallcap Fund, Sundaram Services Fund, and few others are sitting on more than 40-50% cash.

The respective mutual fund houses appear cautious in their portfolio construction activity, recognizing the various factors at play primarily the political and macroeconomic factors. They aren’t necessarily bearish, but cautious.

Let’s look at the implications of high cash-holding on the future performance of a fund

  • An aggressive cash call is a two-way sword. If the markets fall, as a fund anticipates, it provides an opportunity to buy stocks at attractive valuations. For example, a scheme with 30% cash can accumulate more shares when the markets fall and perhaps at a better valuation. On the other hand, a fully invested scheme may not be able to exploit the benefit of falling markets (and stock prices).

  • Alternatively, contrary to expectations, if the market rises, a fund taking aggressive cash calls usually underperforms compared to its peers. Suppose the market goes up 10% in the future, a fully invested mutual fund scheme (performing on par with the markets) with Net Asset Value (NAV) of Rs 100 will generate the profit of Rs 10. But a scheme with a NAV reading of Rs 70 with 70% invested portfolio will generate a profit of Rs 7.

Why are fund managers likely to be bearish on the market?

  1. Despite a sharp fall in stock prices, the valuations of many companies aren’t attractive yet. Therefore, pure bottom-up stock pickers---those choosing companies for their strength, ignoring the prospects of the sector they belong to---may not find suitable investment opportunities.

  2. Growth in corporate profits has been lacklustre with no signs of any meaningful recovery in earnings.

  3. Macroeconomic indicators in India are not very encouraging.

  4. A drought-like situation in some key agricultural states may result in higher food inflation in the future.

  5. Indian financial system isn’t out of the woods yet; and the IL&FS episode has dented the confidence of debt markets.

    [Read: How IL&FS episode impacted your investments in liquid funds]

  6. The tussle between RBI and government has brought issues pertaining to the autonomy of the central bank into a spotlight.

  7. Three states are going into elections shortly, and the election outcomes will be crucial for the fate of the ruling party at the Lok Sabha elections.

  8. There’re too many uncertainties on the global economic front. Trade war tensions, Brexit, volatility in crude oil prices, capital flight from emerging markets since the Federal Reserve is normalizing interest rates, the greenback is strengthening, and the potential slowdown in the global economy have made investors nervous.

A combination of these factors has dimmed the prospects of Indian markets. To add to it, recent cases of poor corporate governance in some index heavy weights has badly affected investors’ sentiments.

Should you invest in mutual funds with substantial cash-holdings?

If your own view on the market is bearish, you might find solace in mutual fund schemes holding more assets in cash. Unfortunately, it isn’t the best way to select a mutual fund scheme.

On the contrary, if you have no view on the stock market and are investing in mutual funds schemes with higher cash holdings, just because somebody told you they will outperform, you are still making a mistake.

Nobody can time the market consistently for long.

If any fund house believes it can do so, perhaps they’re overrating its abilities.

How should you select mutual funds under the current market environment?

Before you invest in a mutual fund scheme, ensure that available schemes pass through stringent quantitative and qualitative selection parameters.

Quantitative parameters involve analysing the schemes’ past performance across timeframes and market phases. While qualitative parameters include a fund manager’s performance, portfolio characteristics, Performance pressure on the fund manager, and the frequency of NFO (New Fund Offer) launches among others.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]

Watch this video to know more about mutual fund selection…


Need more information?

You may read PersonalFN's mutual fund selection methodology.

At PersonalFN, we believe it's as important to know which funds are most suitable for as it’s to carefully select the mutual funds.

Before you invest in any mutual fund, consider the following aspects:

  • Your risk profile

  • Your investment objectives

  • Your financial goals

  • Your time horizon to achieve them

  • Your personalised asset allocation based on the above factors

When you invest, opt for direct plan and take the SIP (Systematic Investment Plan) route to invest in equity mutual funds so that you can mitigate the risk involved and benefit from the power of compounding.

Happy investing!

PS: Want to know which mutual fund schemes to SIP in, the ones worthy for your tax planning, and the lesser-known funds (called hidden gems) capable of generating big gains for you? PersonalFN’s brings to you an exclusive three-in-one combo offer. Click here to know more.

Add Comments

Dec 09, 2018

Good information

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