Equity MFs' cash component hits 6.5% as shares hover at all time high

Recent data shows cash component against total equity AUM a little over 6.5%, a multi-year high

With strong domestic inflows continuing as Indian shares hover at all-time highs, equity fund managers are increasingly taking the precaution of keeping a higher amount of cash.

Recent data shows the cash component against total equity assets under management (AUM) a little over 6.5 per cent, a multi-year high. A year before, the cash position did not exceed four percentage points.

Unreasonably high valuations in the mid-cap and small-cap space are making fund managers wary and they've been cashing out from those positions. Since November, when demonetisation was announced, there's been a problem in deploying these, resulting in a continuous rise in the cash component.

"At any point of time, I have to be sensitive to the risks involved while generating returns for investors. I can't afford to go reckless with investor money at a time when expectations are too high to manage. Efforts are being made to shift as much assets into giants of the sectors, such as L&T, Tata Motors, ICICI Bank, Sun Pharma and Infosys. This might take time to suck out the excess cash liquidity," says one of the top chief investment officers (CIO).

He adds that investors should resist putting additional money via lump-sums at such times. "My advice remains to stick with SIPs (Systematic Investment Plans)," he says.

For instance, ICICI Prudential Mutual Fund's total cash component was 10.2 per cent in April, against 8.8 per cent in March. HDFC MF tends to remain nearly fully invested in stocks but had its cash level rising from 1.5 per cent in March to 4.4 per cent in April. Reliance Nippon, Birla Sun Life MF and SBI MF also chose to increase the cash in their portfolios.

According to Kaustubh Belapurkar, director (fund research) at Morningstar, the investment research entity: "Post demonetisation, a lot of money has come into the system. However, the phase also saw events like Trump's election, the US Federal Reserve move on interest rates and state elections, which kept fund managers on the sidelines."

However, he adds, it's still nowhere close to the years after the 2008 global financial crisis, when MFs sat on cash as much as 15-20 per cent.

Fund managers say there are possibilities of steep correction in share prices in the coming months. "We need to be ready to capitalise on such buying opportunities, on selective counters. Today, you saw how the market reacted. We added Grasim, Hindustan Unilever and YES Bank. Further, the GST (coming goods and services tax) will play havoc in the initial quarter of its implementation. So, it's not too high a cash component. One needs to wait for the moment," says the equity head of a mid-size fund house.