Tipping Point: Why are cash positions of equity mutual funds rising?

These funds are currently sitting on around Rs 50,000 crore of cash pile. This is the result of strong inflows. The other factor is high valuations in some parts of the market, such as the mid- and small-cap segment. Fund managers are becoming wary of investing at high valuations.

Can this affect your fund’s performance?  

Yes, it can. If the markets run up and your fund remains in cash, it will lag behind. If your fund manager takes a high cash call, you will end up having a higher allocation to cash than you desire. Also, when a fund manager takes a cash call, he has to get two calls right. He has to exit equities before the markets fall, and he has to re-enter before the markets rise. Getting both right may prove difficult.