Equity schemes with sizeable cash holdings likely to see limited gains

According to data sourced from primemfdatabase.com, as many as eleven small-cap schemes held 7 per cent of their asset base in cash at the end of June

Equity schemes with sizeable cash holdings could miss out on the gains seen in the recent market rally, as high cash calls in such funds could keep them from fully participating in the rebound.
 

According to data sourced from primemfdatabase.com, as many as 11 small-cap schemes held 7 per cent of their asset base in cash at the end of June. Half-a-dozen large-cap schemes and five small-cap schemes also held over 7 per cent in cash.

“Typically, one would not want higher cash levels in equity schemes, but largely invested portfolios. An investor can take his cash calls if he wants and there are products that allow re-balancing, such as dynamic asset allocation funds,” said Kaustubh Belapurkar, director-MF research, Morningstar India.

The market benchmark Sensex has bounced back from the March 23 lows, with gains of over 41 per cent. Till that point, the 30-share index was down 37 per cent in year-to-date terms.

Experts say the downside from higher cash calls might not be seen immediately as markets have remained range-bound. “In the current environment, the market rally has been driven by select stocks,” said Amit Bivalkar, founder and director of Sapient Wealth.
 

Industry experts say a few schemes had higher cash levels even in the months preceding Covid-19, which in some cases would have helped to mitigate the impact of market meltdown that followed. Equity funds typically carry 5 per cent of their holdings in cash and cash equivalents to meet redemption pressures. Higher cash calls can be attributed to fund managers’ view that markets are over-valued and another round of correction could be on the cards.

Broking houses also advise caution over higher valuations. “Valuations… are no longer cheap. The Nifty is now trading at forward P/E (price-earnings ratio) of 20.4-times, 15 per cent premium to LPA (long-period average),” analysts at Motilal Oswal Financial services said in a recent note. “Valuations are reflecting recovery from H2FY21, leaving limited margin for safety for any negative surprises,” the analysts added.

Experts say fund managers should be wary as taking cash calls could push the fund down the performance scorecard.

“Fund managers can be caught off-guard with such a strategy, as past experience shows it is very difficult to spot market bottoms and deploy cash, and market reversals can also be swift in a volatile environment and cause massive under-performance,” said the chief executive officer of a fund house.

“Within the broader universe, such as small-cap, where the rally has been stock-specific, comparing the individual schemes’ performance against its benchmark would offer a clearer picture of the performance,” said Jimmy Patel, managing director and chief executive officer of Quantum Asset Management Company.

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