Equity MFs activate battle mode, 6.1% cash reserves at the ready

Equity mutual fund (MF) schemes remain flush with cash despite steady inflows, as fund managers adjust portfolios with the market correction creating fresh buying opportunities.

 

As of January-end, equity schemes from the top 20 fund houses held 6.1 per cent of their portfolios in cash, up from 5.9 per cent in December and 5.4 per cent in November, according to a report by Motilal Oswal Financial Services.

 

The rise in cash holdings is primarily due to SBI MF, Quant MF, and Motilal Oswal MF. SBI MF’s cash allocation in equity growth schemes increased from 8.3 per cent to 9 per cent month-on-month, while Quant MF’s rose from 7 per cent to 8.9 per cent. Motilal Oswal MF nearly doubled its cash level from 7.3 per cent to 14 per cent, the report showed.

 

Most other fund houses saw a slight dip in cash levels.

 

While MF executives maintain their mandate to stay fully invested, they keep some cash reserves during periods of market uncertainty and elevated valuations. Cash levels also fluctuate based on inflows, outflows, and major portfolio adjustments. 

 

The benchmark Nifty 50 is set to end lower for the fifth straight month as foreign investors continue selling, and concerns persist over corporate earnings in a slowing economy.

 

However, domestic inflows remain buoyant. Active equity MF schemes saw net inflows of Rs 39,688 crore in January, allowing fund houses to deploy over Rs 55,000 crore into equities during the month.

 

The market correction has eased valuation concerns to some extent for fund managers.

 

“The recent correction has brought about two welcome changes in our allocation frameworks. First, the valuation argument for largecaps, as measured through our preferred gauges of earnings yield to bond yield spreads, is back near historical medians,” SBI MF observed in a note earlier this month.

 

“Second, equity market sentiment, as measured through our proprietary measure, is back towards the neutral region, versus the very stretched readings of the past year. Both these factors, in turn, imply that, versus a significant equity underweight view that we have held for a long time now, we are tilting towards a more neutral view,” it added.