Flexicap, largecap, value funds cut cash in May; midcap, smallcap schemes stay cautious

The cash level of a mutual fund represents the proportion of its assets allocated to cash or cash equivalents.

Mutual fund managers in flexicap, largecap, and value fund categories turned more confident in May, trimming their cash holdings to capitalise on market opportunities, data available with Prime Database MF showed.

However, midcap and smallcap fund managers continued to tread cautiously, holding on to elevated cash levels amid persistent valuation concerns and market volatility.

Indian equity benchmarks put up a good show in May as India and Pakistan announced a surprise ceasefire. During the month, the Nifty 50 Index rose 1.71 percent. In the broader markets, Nifty Midcap 150 Index zoomed 6.30 percent, while Nifty Smallcap 250 Index spiked 9.59 percent.

Overall, Indian mutual fund managers were seen deploying cash in a cautious manner in May, as cash holdings as a percentage of assets of active equity schemes fell from 5.62 percent in April to 5.14 percent last month.

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The market value of cash holdings also dipped from Rs 1.73 lakh crore in April to Rs 1.65 lakh crore in May.

The dip in cash holdings was despite investors pumping in Rs 19,013.12 crore in active equity schemes in May.

The cash level of a mutual fund represents the proportion of its assets allocated to cash or cash equivalents. Cash levels are an important part of managing liquidity in mutual funds.

Funds having a high cash allocation may suggest a sense of caution towards the stock market. Generally, when funds hold a significant cash position, it implies that the market is overvalued or there is an anticipation of favourable investment opportunities in the future.

Deploying cash

In the equity fund category, fund managers were seen favouring diversified and largecap focused funds while deploying cash during May.

Overall cash held by 39 flexicap funds came down to Rs 30,697.26 crore in May against Rs 33,061.40 crore in April. Cash as a percentage of overall category assets also fell to 4.48 percent in May against 4.70 percent sequentially.

Cash held by multicap funds also came down to Rs 5,512.88 crore from Rs 7,498.99 crore on a monthly basis.

Flexicap and Multicap funds both invest across large-cap, mid-cap, and small-cap stocks, but they differ in their allocation approach. Flexicap funds offer fund managers complete flexibility to allocate investments across market capitalisations in any proportion, while multicap funds are required by the Securities and Exchange Board of India (SEBI) to maintain a minimum of 25 percent exposure each to largecap, midcap, and smallcap stocks.

Largecap funds that invest in the top 100 stocks by market cap was another category where cash holding came down.

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Guarded approach

On the other side, midcap funds saw a rise in overall cash allocation from Rs 26,780.29 crore in April to Rs 28,904.74 crore in May.

Further, smallcap funds also saw a rise in the market value of their cash holding to Rs 24,127.58 crore in May against Rs 23,780.36 in April.

Another category that saw high cash holding was focused funds. These equity funds invest in a concentrated portfolio of a limited number of stocks, typically up to 30 companies.

As per a report by PL Asset Management, valuations firmed in May, with Nifty’s Price-to-Earnings (PE) rising to 22.3 times, reflecting a price catch-up.

"While midcap and smallcap valuations stayed above five-year medians, they remained within one-year bands, suggesting normalisation. Over 50 percent of midcaps and smallcaps now trade above their five-year average PEs, while largecap valuations remain earnings-aligned," the asset management firm said in a note.

Major movers

Data available with Prime Database MF showed that many big holders of cash saw a drop in holdings during the month.

PPFAS Flexi Cap continued to have the highest allocation among active equity funds at Rs 10,536 crore, however, the allocation saw a major drop from 13 percent to 10.1 percent during the month.

Further, Motilal Oswal Midcap, which has a major cash component, saw a drop in its allocation as a percentage of the scheme's net assets.

On a percentage basis, the funds of Motilal Oswal Mutual had among the highest cash allocations.