Equity funds are sitting on the biggest pile of cash in recent years. At an aggregate level, equity funds are holding in excess of 4% in cash—not high in absolute terms, but high compared to last three years. Eighteen equity schemes have parked in excess of 10% of the portfolio in cash, and as many as 106 equity funds are holding more than 5% in cash. Data suggests the cash waiting on the sidelines stood in excess of Rs.70,800 crore at the end of September. Funds often use cash tactically in certain market conditions, but does this add value to the investor? Is the fund manager right in taking that call on the investor’s behalf?
Schemes often maintain 3-5% in cash towards redemption requests. However, when funds step well beyond this zone, it is usually for tactical reasons. Beyond liquidity compulsions, a few equity funds are known to take cash calls as a strategy. The aim is to protect returns anticipating a market decline and to keep gunpowder ready for entering at lower prices. Rohit Shah, CEO, GYR Financial Planners, points out, “It is an attempt to de-risk the fund amid market uncertainty and provide a cushion against a fall.”
Among the biggest cash hoarders at present are schemes from Axis MF, ICICI Prudential MF and SBI MF. The fund managers do not share the wider market’s enthusiasm for equities. Chintan Haria, Head, Products & Strategy, ICICI Prudential AMC, explains, “Indian equity market valuation currently is at a historic premium to other emerging markets. With falling global trade and an expanding fiscal deficit, Indian markets may see some consolidation and offer opportunities. In such an environment, having some cash cushion will allow opportunistic buying.” Having this war-chest on standby to put into action immediately is critical during sharp market swings, insist fund managers.
Rajeev Thakkar, CIO, PPFAS Mutual Fund, occasionally uses cash in his funds as a shield during market excesses. It allows him to quickly deploy when the market nosedives, like he did during the market crash of March 2020. At the same time, others shun cash calls as a policy. They prefer to remain fully invested at all times, barring nominal cash holding for liquidity purposes.
Toying with cash does not suit the needs of investors seeking full participation in the market, they insist. Thakkar has a different take. “At times, the flows are a bit uneven or the valuations are lopsided. Rather than rush and buy anything at any price, we prefer to take time to deploy,” he maintains.
Another counter to tactical use of cash is that asset allocation is often handled at the investor’s level itself. Some even engage with financial advisers to get the allocation right. If the fund manager also starts taking cash calls, it only complicates matters for the investor and may create conflict with their existing asset allocation, finds Arun Kumar, Head – Research, FundsIndia. The fund manager should not be taking a view on the market, unless the fund is an asset allocation fund, he insists. But Amol Joshi, Founder, PlanRupee Investment Services, insists the incremental impact of higher cash position in funds on the investor’s asset allocation is minimal, up to a point.
Beyond this, critics say cash calls often go wrong. Trying to time the market has proven to be a futile exercise. One simply cannot determine where the market will head at any given time. Being under-invested during a market uptick can lead to severe underperformance. Shah asserts, “Taking cash calls is like betting against the market, which is not the funds’ mandate.” Besides, funds are not particularly adept at playing this game. “The track record of asset management companies in tactical use of cash is not great. No fund does it well enough consistently,” says Kumar. Even if a fund occasionally gets it right, it routinely misses out on gains, and these mistakes compound over time. After being caught napping, they later struggle to play catch-up with the index and peers.
A prominent example of cash calls gone awry is Quantum Long Term Equity Value, the flagship scheme of Quantum AMC. For the longest time, this once highflying value-centric fund consciously kept away from the market. At one point in 2015, the debt and cash holdings in the fund crept up beyond 30%. The fund manager deemed valuations too expensive and preferred not to deploy fully for years. By the time the value theme picked up earnestly, the fund was still leaning heavy on cash to be able to ride the upside. It now severely lags its peers who were better positioned to catch the rotation towards value stocks.
It is a thin line that fund managers tread, insists Kumar. “It can be a trap. If you are out of the market and it moves up, you are perennially waiting for it to come down again and deploy so that you recover lost ground.” But Haria insists cash calls can add value when used sensibly. “It gives the fund manager added lever to take full advantage of price corrections. Yes, there is a flipside to it, like missing out in a runaway market, but irrationality does not last for very long.”