Mutual funds deploy dry powder as corporate tax cut boosts sentiment

The spectacular run-up in Indian equities on Friday would have caught many fund managers off guard, especially those sitting on a sizeable amount of cash.

Five of the top 10 mutual funds by equity value are holding cash in the range of 8-11 per cent, a reasonably high number. Some of this dry powder appears to have been deployed on Friday going by the quantum of shares purchased by domestic institutional investors (DIIs). Provisional data on the BSE shows that these investors shopped for shares worth Rs 3,001 crore, even as FPIs stayed on the sidelines with net purchases of Rs 36 crore.

“Fund managers hold more cash when they are not comfortable with valuations,” said Dhaval Kapadia, director-portfolio specialist, Morningstar Investment Advisers India, adding that it would be too much to expect fund managers to account for announcements like those made on Friday. Equity funds typically hold cash between 1-5 per cent of the scheme’s assets, and raise their cash exposure when they expect the market to fall or the risk-reward situation is not favourable. It might go against the fundamental tenet of staying invested at all times, but is a strategy employed by fund managers either to protect the downside in the event the market falls or to avoid paying a high price for a stock. This means if stocks are not available at reasonable valuations, fund managers may decide to raise their cash holdings. This number can also fluctuate depending on the scheme mandate. Kapadia said that valuations will have to be relooked at now in the light of the cut in corporate tax rates. “The cut will prop up earnings growth in the short term but it remains to be seen if it will boost core business and consumption growth in the next few quarters,” he said.

It has become tougher to stay fully invested in the past few years, with money chasing select names and pushing up valuations. Holding a high percentage of assets in cash, however, can backfire in a rising market.