Equity mutual funds are flush with cash: What does this mean for investors?

Even as retail investors continue to pour money into equity schemes, fund houses are finding it difficult to invest the fresh inflows when valuations are high. Some equity mutual funds have up to 16% of their corpus in cash.

The cash holding of Invesco India Dynamic Equity Fund, for instance, has been 18.5% in the past six months. “Given the current higher valuations, our cash holdings have been on the higher side,” admits Taher Badshah, CIO (Equities), Invesco Mutual Fund.

High cash levels for long periods can drag the performance, say analysts. The Invesco India Dynamic Equity Fund has underperformed its benchmark in the past six months. This is not an isolated case. As the table shows, most funds with high levels of cash have lagged their benchmarks.


Equity funds with highest cash levels
Funds with too much cash have lagged their benchmarks in the past six months.

Equity funds maintain some cash levels based on market valuations, liquidity purposes and fresh purchases, but the figure doesn’t go beyond 6-7%. In the short term though, cash levels could increase if there are huge inflows into the fund, or the manager is waiting for suitable investment opportunities to deploy the funds.

But these should typically revert back to normal soon, say analysts. “When managers are fully invested, their cash levels will be in the 5% range,” says Kaustubh Belapurkar, Director, Manager Research, Morningstar India.

Cash is a double-edged sword. “High cash levels can help if there is a correction, but it can also impact the performance if there is a strong up move,” says Harsha Upadhyaya, CIO (Equity), Kotak Mutual Fund.

For instance, post the Lehman crash, markets corrected sharply and many managers maintained a fair amount of cash in their portfolios. The average industry cash holding was about 19% in early 2009.

Post the election result in May 2009, markets surged again with managers yet to fully deploy their cash holdings. This resulted in funds underperforming the benchmark during this period. “Over long runs, holding cash has turned into an advantage for funds that can manage it well,” says investment adviser Vipin Khandelwal.

“Investors should note that higher cash holdings can impact fund returns in case the fund manager is not able to time market movement,” says Jiju Vidyadharan, Senior Director, Funds & Fixed Income, CRISIL Research.

If your fund has high cash levels for a short term, there is no need to worry. “The only time cash levels could materially impact an investor is when the fund manager maintains high levels of cash through an entire market cycle,” says Mrinal Singh, Deputy CIO – Equities, ICICI Prudential Mutual Fund.

On a regular basis though, keep checking the portfolio of your funds. To start with, if your fund is sitting on high cash levels for more than two quarters, it is a red flag to watch out to take corrective measures, say experts.