Equity mutual funds are flush with cash: What does this mean for investors
Even as retail investors continue to pour money into equity schemes, fund houses are finding it difficult to invest the fresh inflows when valuations are high. Some equity mutual funds have up to 16% of their corpus in cash.
The cash holding of Invesco India Dynamic Equity Fund, for instance, has been 18.5% in the past six months. "Given the current higher valuations, our cash holdings have been on the higher side," admits Taher Badshah, CIO (Equities), Invesco Mutual Fund.
High cash levels for long periods can drag the performance, say analysts. The Invesco India Dynamic Equity Fund has underperformed its benchmark in the past six months. This is not an isolated case. As the table shows, most funds with high levels of cash have lagged their benchmarks.
Equity funds maintain some cash levels based on market valuations, liquidity purposes and fresh purchases, but the figure doesn't go beyond 6-7%. In the short term though, cash levels could increase if there are huge inflows into the fund, or the manager is waiting for suitable investment opportunities to deploy the funds.
But these should typically revert back to normal soon, say analysts. "When managers are fully invested, their cash levels will be in the 5% range," " says Kaustubh Belapurkar, Director, Manager Research, Morningstar India.
Cash is a double-edged sword. "High cash levels can help if there is a correction, but it can also impact the performance if there is a strong up move," says Harsha Upadhyaya, CIO (Equity), Kotak Mutual Fund.
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