Cash held in a portfolio is mostly invested in money market instruments such as treasury bills
Cash is also a position – says the old school investing wisdom. As interest rates get closer to zero or even negative in many developed economies – especially on very short-term instruments – many may question using cash as a position. However, many equity funds do have cash in their portfolio.
Cash is inevitable in most equity mutual fund portfolios. In the case of exchange traded funds tracking indices, the fund managers need not be worried about redemptions. In that case the cash can be the small residual part which cannot be deployed economically. Most fund managers deploy much of their cash in stocks after factoring in the redemption needs of the scheme.
Typically fund managers of open-ended schemes are seen holding cash up to 2-3 per cent of the money. However, if the fund manager expects high volatility in the stock market, then the cash exposure may go up.
Holding cash positions
Cash held in a portfolio is invested in money market instruments such as treasury bills or other bonds that mature in the near term. Hence, it is mentioned as cash and cash equivalents or cash and debt assets.
In some schemes fund managers maintain high cash levels compared to peers. For example, Axis Bluechip held 13.22 per cent of its assets in debt, cash and other current assets in June 2020. The same stood at 15.32 per cent in June 2019.
Quantum Long Term Equity has also maintained high cash levels in the past. For example, in June 2019, it had 14.37 per cent in money market instruments. The exposure went down to 8.94 per cent in June 2020.
Keeping a high level of cash to avoid a fall in net asset value (NAV) of the equity fund in anticipation of a market crash, can be very risky. If the fund manager sits on cash and the market continues to go up, then the scheme may underperform the benchmark as well as peers.
Equity funds need to invest a minimum of 65 per cent of their portfolios in stocks and other equity instruments. Equity linked saving schemes (ELSS) need to invest at least 80 per cent of their portfolios in stocks and related instruments.A high cash level indicates that the fund manager is not getting enough opportunities to deploy cash or is expecting increased volatility. Cash levels should be seen in the context of historical holdings (percentage of assets). Savvy investors can measure the sentiment in the market by looking at cash levels of fund managers. Typically, high cash levels in equity schemes is a sign of high valuations in the market.