India’s mutual funds are sitting on large piles of cash. Recently, brokerage firm Motilal Oswal Financial Services (MOFS) found that the cash proportion of the Assets Under Management (AUM) of India’s top 20 mutual fund houses was the highest in 25 months in January. Let us try to understand the rationale behind this trend.
Looking at the numbers
According to data compiled by MOFS, the average cash holding of the top 20 AMCs was 5.9 percent as of January-end. PPFAS MF held the maximum cash as a proportion of its AUM, at 15.6 percent, whereas Mirae Asset MF held 1 percent, which was the least.
The generally accepted normal range of cash proportion held by MFs is 1- 5 percent. However, only eight among the top 20 MF houses are currently holding cash below 5 percent of their AUM.
Ravi Gopalakrishnan, CIO- equity, Sundaram Mutual Fund, said earlier, “We remain reasonably invested across chosen businesses with cash levels having broadly remained around 3-5 percent. We believe in adhering to the investment process through various market phases to eliminate noise and back our convictions.”
Diverting briefly from the MOFS report, data compiled by Value research in January showed that the average cash holding of all equity schemes in India rose to 4.9 percent at the end of 2022, up from 4.2 percent in 2021.
This shows us that even if we look at the superset containing all the MF houses in the country, the proportion of cash is on an upward trek.
Why could MFs be holding so much cash?
There can be many reasons behind the increasing proportion of cash in MF houses.
In the uncertain macroeconomic situation, market sentiment is cautious. A quick view of the AUM growth curve shows us that the total AUM for the MF industry fell for the second straight month to Rs 39.6 trillion in January. On the other hand, the AUM of the less-risky liquid funds increased to Rs 46 billion.
Given the uncertain and volatile market environment, fund managers are preferring not to be aggressive while deploying the inflow of money, and wait for a better entry point to invest.
Also, macroeconomic challenges like fiscal deficit at staggering heights and high inflation are possibly keeping fund managers on the sidelines.
Ravi Gopalakrishnan noted, “While geopolitical events and their ramifications could create volatility and short-term underperformance or outperformance in funds based on their positioning, we constantly keep assessing if the structural investment thesis remains intact. History has revealed that on most occasions, such volatility does provide good entry points to add positions in several high-quality businesses.”
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