While most participants were cheering the jump in equity benchmarks on September 20 after the government slashed corporate tax rate, most fund houses who were sitting on a huge cash pile may have missed the bus.
The impact of the jump in market indices was seen in the day's closing NAV of equity funds.
In fact, most equity schemes saw their net asset values rallying up to over 8 percent in a single day on September 20.
Sensex gained 1,100 points on September 23. The largest gainers were exchange-traded funds or ETFs. For instance, the schemes that gained in one-day were Kotak Banking ETF, Reliance ETF Bank BeES and SBI ETF Nifty Bank Fund each giving 8.31 percent return or gain in the one-day time frame as on September 20 vs September 19th.
During the same period, IDFC Focused Equity Fund gained 7.51 percent and UTI MNC Fund gained 6.06 percent.
It is said that these funds were sitting on minimal cash levels and were able to capitalize on the market rise on Sep 20.
Typically, equity funds hold cash 1-5 percent of a scheme’s corpus in cash, though some funds can hold as high as 7-10 percent.
However, the equity schemes that were holding a huge cash pile up may have missed the opportunity to witness gains in its net asset value.
According to data collated by ACEMF, 63 equity schemes were holding more than 10 percent in cash and cash equivalent as on Sep 20. Of this, 12 schemes were sitting on more than 20 percent cash in the portfolio
The highest cash holding was in ICICI Prudential Bharat Consumption Fund-Series 2. The scheme held as high as 34.50 percent in cash and cash equivalent. This was followed by ICICI Pru MNC Fund and ICICI Pru Value Fund which held 33.53 percent and 30.81 percent, respectively, in cash.
The data indicated that most schemes from ICICI Prudential Mutual Fund were holding significant assets in cash.
In volatile markets or when markets are consistently rising, some schemes prefer to book profits and hold cash.
"We were sitting on cash due to volatile markets and were waiting for the right opportunity to invest but FM's move led to a big upmove and we missed it," said a fund manager on condition of anonymity.
Generally, fund managers hold cash for two reasons. One is to look for buying opportunities. For instance, if a stock price falls on a given day or has been falling over a period of time to a level which the fund manager feels is an optimum price to buy, he/she may buy some shares.
Second, when your fund manager books profits but does not feel the need to redeploy the money soon. He/she sits on cash until they find a right opportunity to buy.