Indian fund managers are facing a problem of plenty....but not of good investment ideas. Rather, they are unsure of how to deploy the money that is raining into their funds. With benchmark indices hitting fresh highs almost every other day, retail investors are rushing to put money into mutual funds. In normal market conditions, that would have been a blessing. But with stock prices having run up, there is a dearth of good investment ideas available at a reasonable price. And as legendary value investor Warren Buffet famously remarked: "It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
Fund managers are in a dilemma--if they choose not to invest the cash, there is a risk that their funds will underperform if the market continues to rise. But if they invest and the market crashes--which usually happens when stock prices become expensive--it could take a while for the share prices to recover.
Most fund managers are choosing to stay in cash, which appears to be a safer option than buying expensive stocks.
“We are sitting on 3-4 percent cash in our equity fund but in most of our funds we are fully invested said S Naganath, President and Chief Invesment Officer, DSP BlackRock Investment Managers.
Over the last six months, benchmark indices have surged around 18 percent, and many midcap stocks have more than doubled during this period.
Many mutual funds turned cautious in January-February 2017 as the Nifty and the Sensex crept up towards the psychological levels of 9,000 and 30,000. A few small and midcap funds such as DSP BlackRock Micro Cap Fund and Mirae Asset Emerging Bluechip Fund stopped accepting subscriptions citing high valuations.
The fund industry has been attracting around Rs 4,500 crore per month into equity schemes through systematic investment plans or SIPs which is more than Rs 2,500-3,000 crore received per month last year.
According to the data on the Securities and Exchange Board of India, mutual fund houses invested a tad over Rs 9,000 crore in equities in April.
But the market is not showing any signs of pausing for a breather.
PPFAS Mutual Fund is sitting on cash, cash equivalents, money market, arbitrage positions which amount to about 16 percent of the portfolio.
Rajeev Thakkar, Chief Investment Officer at Parag Parikh Mutual Fund in its monthly note said they will continue to follow traditional valuation parameters and wait for stock prices to cool.
“Whenever we have cash, we do not force ourselves to invest if opportunities are not present. The work to identify opportunities continues at all points in time,” said Thakkar. Even though valuation of some companies have hit the roof, he continues to remain excited by the bottom-up stock picks that we make or continue to hold.
Fund houses have been steadily enhancing cash levels in equity funds. Birla Sun Life Mutual Fund’s Co-CIO Mahesh Patil said they are holding 5-6 percent cash in their equity funds.
Normally, mutual funds maintain 4-5 percent cash levels to honour redemption commitments.
The reason, according to these funds, is to be ready to pick up bargains when the market corrects.
“Fund industry as a whole is sitting on nearly 6 percent cash and any correction in the market would be looked as a buying opportunity," said Harsha Upadhyaya, CIO, Kotak Mutual Fund.
The stock market is not showing any signs of fatigue yet, but mutual fund managers are not taking any chances.
As on March 31, 2017, ICICI Prudential had nearly 8.8 percent of its total corpus in the form of cash, according to Edelweiss. Franklin Templeton, meanwhile, was sitting on 6.7 percent cash. SBI Mutual Fund, UTI and DSP BlackRock have cash levels of 3-5 percent of their equity corpus. The average level of cash with mutual funds was less than 4 percent of the corpus in 2016.
Brokers say one reason for this trend could be that most stocks in this segment appear over-priced at current levels. Another reason for sitting on a huge chunk of cash levels is to protect net asset value of equity plans.
Banking, capital goods, fast-moving consumer goods, and other infrastructure-oriented companies would be most favoured investment avenues for fund managers, who are holding on their investments.
However, equity fund managers are going selective on information technology and pharmaceutical sectors.
Investment in equity funds can reap at least 18-20 percent annualised return over a three-year horizon, mutual fund managers said, advising investors to enter equity funds via systematic investment plan.