Cash levels in equity MFs double in 4 months

Equity funds sitting on Rs 39,600 crore cash or 6% of AUM

Cash levels in equity mutual funds (MFs) have reached almost six per cent in March amid a sharp rise in stock prices. The cash levels are the highest in at least two years. At Rs 39,600 crore at the end of March, these are more than double the levels seen at the end of November 2016, according to a report by Edelweiss. On a year-to-date basis, cash as a percentage of equity assets under management (AUM) has increased 116 basis points, or by Rs 18,800 crore. The benchmark indices have gained more than 10 per cent during this period, while the rally in the broader market has been even sharper.

Continuous and robust inflows into equity schemes coupled with profit-booking by fund managers in the mid and small cap space are seen as the reason for the increase in the cash pile.

The sudden surge in cash component has been seen at fund houses, including IDFC Mutual Fund, Kotak Mutual Fund and Axis Mutual Fund, and are largely responsible for the rise in cash with the equity funds segment. Schemes of Birla Sun Life AMC, put together, have also seen cash levels rise.

Expensive valuations or weak outlook for certain sectors triggered some profit-taking, said fund managers. 

Neelesh Surana, head of equity at Mirae Asset, says, “There were selective pockets that the money had been chasing. This led to an erosion of margin of safety which may have triggered selling resulting into high cash.”

Money managers said they pulled out money from stocks in the technology, pharma, oil, cement and some non-banking finance companies.

Kaustubh Belapurkar, director (fund research) at Morningstar India, says events like demonetisation, the US presidential election and the US Federal Reserve move on interest rates have kept fund managers guessing and resulted in a cautious stance. But, he isn’t worried due to the increase in cash levels.

“Cash level of six per cent, although high, is not alarming and nowhere close to 2009-10 levels, when the industry took a conscious cash call to as high as 15-20 per cent. I see the current aggregate cash levels as a temporary blip and as opportunities come in, fund managers would start re-deploying cash in stocks,” said Belapurkar.

An official at Kotak Mutual Fund said, “It is partly due to shift of positions from cash to futures for the arbitrage opportunity.”

Fund inflows have also been robust.

Surana say, “Markets have moved quite fast in recent times while inflows remained strong. Last minute cash inflows in tax saving schemes, too, have added cash. Amid this, I think return of money from IPOs allotment too would have added up the cash.”

A chief investment officer (CIO) of a bank-sponsored fund house echoes similar views. He says that industry got a massive net inflow of Rs 50,000 crore in the past six months. “All of the inflows don’t get deployed immediately. The sharp run up in stocks has delayed the cash deployment,” he adds.

Fund managers, however, ruled out sustained selling and said they would deploy the cash depending on how earnings pan out. They don’t rule out a correction of up to five per cent, given the steep rise in markets over the last few months. “Those times will throw opportunities and excess cash could be easily absorbed,” says the above cited CIO.

As on 31 March, the total equity assets (including equity-linked savings schemes) stood at about Rs 5.4 lakh crore managed by nearly 480 schemes.