NFOs drive mutual fund cash holdings to eight-month highs; valuation concerns written off?

A large portion of the NFOs were sectoral/thematic funds, focused on manufacturing, innovation and cyclical themes.

Warren Buffett, one of the world’s wealthiest individuals and the head of Berkshire Hathaway, is holding a staggering $277 billion in cash, accounting for 25 percent of his total assets. On a similar, but unrelated note, domestic fund managers have ramped up their cash holdings to multi-month highs.

According to an average of 42 of the 44 AMFI registered mutual funds in India, the cash position taken by fund managers has surged to the highest level in eight months. The amount of cash holdings as a percentage of the entire equity AUM has ticked up to 5.03 percent.

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So what’s driving fund managers to keep cash reserves?

A reason why fund managers could be holding off on investing is lofty valuations, low upside potential or the fear of an impending correction.

Siddharath Arora, Director and Head of Products & Research, Equirus Wealth, said, “With few mid and small cap stocks looking overvalued, escalating geopolitical situation, and with relative stress in the US economy is making fund managers increase their cash position.”

However, institutional investors have just seemed to accept the high valuations for various reasons. According to Kotak Institutional Equities, the DIIs and FIIs expect large returns from the market at all price points, based on their experience over the past 3-4 years.

"The institutional set seems to have accepted that the non-institutional investors will continue to stay bullish and bid stocks at all price points and thus, they have a more expansive view of valuations," said the brokerage.

Therefore, even in June and July when experts were bemoaning over high valuations, AMCs launched 32 new funds, mobilising a total of Rs 31,792 crore in two months.

When a new fund closes its offering, the money collected does not have to be deployed immediately; the fund manager has up to six months to disburse the cash. Which is why, for a Motilal Oswal fund manager, any increased cash holdings isn’t a strategic move.

“Yes, cash levels have gone up. Even in our own flexicap and midcap funds, we have temporarily raised cash. However, it is pending deployment based on market opportunities during the volatility. It is not a strategic asset allocation,” said Ajay Khandelwal, Fund Manager, Motilal Oswal AMC.

A large portion of the NFOs were sectoral/thematic funds, focused on manufacturing, innovation and cyclical themes. “We believe due to investor demand for higher allocation to these preferred themes will continue and there is enough demand in terms of investor flows towards this,” added Khandelwal.

However, a key fear of reinvestment risk remains. While cash helps fund managers tide over volatility, they might not be able to invest money at the same levels, instead taking a minor haircut in terms of returns ahead.

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