Diversified equity schemes seem to prefer cash over equity. According to ICRA online data, some schemes have close to 60% of their total assets under management (AUM) in cash.
Industry experts say that most funds are sitting on cash anywhere between 10-15% of AUM, as the market continues to move in a narrow range. ``Our analysis shows that the cash portion of the portfolio has been growing steadily in the last few months,'' says a mutual fund analyst.
Why are funds sitting on cash, when they can buy shares cheaply and maximise returns for their investors? ``A fund could be sitting on high cash levels for a variety of reasons, including waiting for the correct entry point to negative or range-bound market view. In case of NFOs, the fund may also be in the deployment mode,'' explains Sameer Kamdar, ceo, Asset Management, ASK Investment Holdings. ``People don't think the market will move up sharply soon. In such a situation, they prefer to stay on cash,'' says Waquar Naquvi, ceo, Taurus Mutual Fund. ``Most fund houses are sitting on cash up to 15-30%.''
Another reason why some of the schemes may prefer to sit on cash is because of the nature of their investment. ``When you are running a small or a mid-cap scheme or a scheme looking for new opportunities, you will have to keep some cash aside. Especially in a market like this, the cash could come in very handy,'' says an MF manager, who doesn't want to be named. ``Also, some funds try to show better performance by sitting on cash, as most funds are in the negative territory.''
However, Naqvi points out that extremely high cash element in the portfolio won't work over a long period of time. ``It should be a short term strategy. If you keep extremely high percentage of cash, then you won't qualify as an equity MF for the tax purpose. And the investors would suffer,'' he says. An equity fund should have to invest at least 65% of its portfolio in stocks to qualify for the long term tax-free capital gains status.
So, what exactly is the ideal percentage of cash in a portfolio? Some fund managers believe 5% cash is ideal, but they point out that ideal percentage works in an ideal market. ``There is no ideal percentage of cash one should have in the portfolio. It all depends on the style and the view of the fund manager,'' says Kamdar. ``MNCs may have such figures, but Indian companies don't stick such rules,'' points out Naqvi.
Industry experts say that most funds are sitting on cash anywhere between 10-15% of AUM, as the market continues to move in a narrow range. ``Our analysis shows that the cash portion of the portfolio has been growing steadily in the last few months,'' says a mutual fund analyst.
Why are funds sitting on cash, when they can buy shares cheaply and maximise returns for their investors? ``A fund could be sitting on high cash levels for a variety of reasons, including waiting for the correct entry point to negative or range-bound market view. In case of NFOs, the fund may also be in the deployment mode,'' explains Sameer Kamdar, ceo, Asset Management, ASK Investment Holdings. ``People don't think the market will move up sharply soon. In such a situation, they prefer to stay on cash,'' says Waquar Naquvi, ceo, Taurus Mutual Fund. ``Most fund houses are sitting on cash up to 15-30%.''
Another reason why some of the schemes may prefer to sit on cash is because of the nature of their investment. ``When you are running a small or a mid-cap scheme or a scheme looking for new opportunities, you will have to keep some cash aside. Especially in a market like this, the cash could come in very handy,'' says an MF manager, who doesn't want to be named. ``Also, some funds try to show better performance by sitting on cash, as most funds are in the negative territory.''
However, Naqvi points out that extremely high cash element in the portfolio won't work over a long period of time. ``It should be a short term strategy. If you keep extremely high percentage of cash, then you won't qualify as an equity MF for the tax purpose. And the investors would suffer,'' he says. An equity fund should have to invest at least 65% of its portfolio in stocks to qualify for the long term tax-free capital gains status.
So, what exactly is the ideal percentage of cash in a portfolio? Some fund managers believe 5% cash is ideal, but they point out that ideal percentage works in an ideal market. ``There is no ideal percentage of cash one should have in the portfolio. It all depends on the style and the view of the fund manager,'' says Kamdar. ``MNCs may have such figures, but Indian companies don't stick such rules,'' points out Naqvi.
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1 comment:
Going by the Fact Sheets of Most Mutual Funds these days, one thing is crystal clear. They are sitting on Huge Cash.
While Funds typically do have cash in hand at around 5%, it is susprising that across board, maximum Funds are not holding cash levels ranging anywhere between 10% to even 60% in some cases!!!. And, Some Funds like Reliance Natural Resources Fund has been sitting on Cash of upto 30% for more than a year now!!!
Why are funds sitting on cash, when they can buy shares cheaply and maximise returns for their investors?
A fund could be sitting on high cash levels for a variety of reasons, including waiting for the correct entry point to negative or range-bound market view. In case of NFOs, the fund may also be in the deployment mode. Fund Managers do not want to get caught with a Falling Knife. They seem to be waiting for the market to find some kind of support and then plunge in gradually. Moreover, sitting in cash in a falling market protects the NAV and ultimately, that's what the Fund Manager is paid for.
However, a note of caution is required in that, the extreme high cash element for a long period of time could work against the Fund's performance as the Fund Manager may miss out on any rally.
Also, if the fund does not invest at least 65% of its portfolio in stocks, (insteads keeps it in cash and debt), then the fund will not qualify for the long
term tax-free capital gains status.
However, upto 5% cash in hand is considered ideal by most Fund Managers and is in fact recommended. And in Bear or a Range-bound Market, 15-20% cash compotent is permissible.
Best of luck,
Srikanth Shankar Matrubai
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