Leading fund managers warn investors that cash level does not protect mutual fund portfolios

By the end of July 2024, the top 26 fund houses’ equity mutual fund schemes had approximately Rs 80,000 crore in cash, according to the research.

Fund managers warn that mutual fund holdings at the cash level are not protected, with top 26 fund houses’ equity mutual fund schemes having around Rs 80,000 crore in cash by July 2024. They are implementing strategies to mitigate damage in market declines, but the general sentiment remains “buyer beware.”

Fund managers discussed portfolio protection strategies, including cash calls and low-beta stock focus. However, they resisted significant cash calls, assuming investors made proper asset allocation decisions and remaining predominantly invested in equities, as per a panel discussion.

Ashish Gupta, CIO of Axis Mutual Fund, suggests that increasing cash from 90% to 95% is a marginal hedge and doesn’t significantly impact returns. He advises not playing too much with cash levels in equity funds.

HDFC Asset Management’s Senior Fund Manager, Roshi Jain, maintains that despite slightly higher cash levels, they remain 90% invested in equities due to the optimistic long-term market horizon. Dinesh Balachandran, Head of Equity at SBI Mutual Fund, also notes that elevated cash levels across the industry indicate discomfort with current valuations.

For instance, the cash level in a contra fund at the moment is about 13 percent,” he stated. You may therefore say that I’ve been a little uneasy about valuations.” He made the point that another factor driving up the high cash levels is the dearth of profitable investment alternatives. “I could identify a lot of chances and set a 20 percent IRR criterion about three years ago. Even two years ago, there would have been a respectable variety of opportunities if I established a high teens IRR criteria.

The individual expressed discomfort with valuations and high cash levels in a contra fund due to a lack of lucrative investment opportunities, comparing it to a 20 percent IRR threshold three years ago.

It’s quite hard to locate good possibilities these days if I set an IRR higher than 15 percent. However, I ask myself if I should still aim for a 16–17% IRR threshold or if I can live with a somewhat lower IRR threshold, considering that all other options are in the single digits.” A somewhat lower IRR requirement of 13 percent, according to Balachandran, is “not so bad” given the ongoing rise in valuations. Rajeev Thakkar, the chief investment officer of PPFAS Mutual Fund, which oversees assets valued at Rs 67,605 crore, was the fund manager who struck out as a contrarian.

According to him, considering the current state of the market, his cash levels are above normal. According to Thakkar, he has never bought into the notion that capital inflows should lead one to abandon all commitments to stocks in favor of disregarding valuations and market outlooks. Currently holding fifteen percent in cash in his funds, he chooses to take active cash calls. By the end of July 2024, the top 26 fund houses’ equity mutual fund schemes had over Rs 80,000 crore in cash, up 27% from June’s Rs 62,700 crore, according to a Motilal Oswal analysis. As a result, the aggregate cash proportion increased from 4.6 percent in June to 5.4 percent, a 15-month high. This increase in cash on hand comes after

With the Nifty 50 trading at a 12-month forward PE ratio of 20.2x, above its five-year average of 19.3x, this spike in cash reserves comes after a robust bull market.

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