Equity MF cash levels at multi-year high

ICICI Pru MF, the largest fund house, has raised this to 12%; sectoral level at 5%, from 3.8% in Nov

The cash pile of equity mutual funds (MFs) has climbed to multi-year highs, amid sharp investor inflows since October. Steep volatility in the markets has made fund managers cautious, awaiting opportunities to deploy the cash.

According to an Edelweiss report, January ended with the aggregate cash portion of equity MFs at Rs 28,300 crore, five per cent of all assets under management (AUM). This was Rs 20,800 crore or 4.73 per cent of equity AUM a month before, and from Rs 16,600 crore or 3.77 per cent at end-November. For the major part of 2016, the cash level of equity MFs was below 4 per cent.

Those in the sector say the decision to raise cash levels is not a uniform one among fund houses. At the largest one, ICICI Prudential, it is a little over 12 per cent or nearly Rs 10,000 crore — that could have skewed the sector average for January. At this level, the fund house accounts for a little over a third of the sector's overall cash position. In November, which saw the demonetisation move, ICICI Prudential was sitting on 4.53 per cent cash, considered reasonable. This, however, became 6.9 per cent in December and then 12.08 per cent in January.

Nimesh Shah, chief executive (CEO) at ICICI Prudential MF, says: “Several funds have dynamic asset allocation. They normally tend to reduce exposure in equities when the markets are high and increase the allocation in debt instruments. Schemes have to stick to their investment mandates.”

For instance, its Dynamic Fund, a multi-cap one, with an asset size of Rs 6,077 crore, generally decides the percentage of investments after considering the prevailing market and economic conditions. Similarly, its Balanced Advantage Fund — larger than the largest equity scheme in the country, with an asset size of Rs 17,400 crore — has an active inbuilt allocation on a daily basis. According to Value Research data, the fund currently has 14.5 per cent of its assets as cash and cash equivalent.

In absolute cash, ICICI Prudential MF is followed by SBI MF with a cash aggregate of Rs 3,200 crore and Franklin Templeton MF at Rs 2,500 crore.

A Balasubramanian, CEO of Birla Sun Life MF, says: “There are multiple factors which decide the cash level in the equity category. Since we are amid a results season after the demonetisation move, investment managers tend to wait before deploying cash. It’s natural to have a lag period and there is no conscious attempt to raise the cash levels. The past few months have seen strong inflows and it usually takes time for fund managers to deploy cash. In between, several counters keep offering opportunities to invest.”

Kaustubh Belapurkar, director (fund research) at Morningstar India, says: “There has been quite a lot of volatility in stock markets, while inflows were strong. Generally, at such times, fund managers tend to be more cautious, which is right to an extent. As far as they stick to the investment mandate, which is paramount, there should not be a problem and the current situation does not look alarming.”

It shows in the pattern of monthly investment by equity fund managers. Against an average monthly Rs 10,000-odd crore during the October-December quarter, they managers applied brakes in January and pumped only Rs 5,200 crore into stocks as the markets inched higher.