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Mutual funds are cashing in - Views on News from Equitymaster
 
 
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  • Jun 5, 2001

    Mutual funds are cashing in

    Why would an equity fund hold significant percentage of its net assets in cash? After all investors do not invest in equity funds so that the fund manager can put their money in call money or keep it in a bank account.

    Investors can keep their money in the banks themselves. In any case most investors do bank regularly. They most certainly don't expect fund managers to do that for them. They expect fund managers to do what they canít do i.e. pick stocks.

    Lately we have seen a lot of funds holding significant percentage of their net assets in cash/call money. Rather than be surprised at this, it would do well for us to appreciate why the fund needs to hold so much cash.

    Typically funds hold cash for 3 reasons.

    • They anticipate good buying opportunities in the future and like to be armed with cash to buy the right stock at the right time.

    • There are no buying opportunities in the current market. Markets are in a state of flux and remaining invested in equities could be hazardous for the fund. Holding cash is less risky and therefore preferable.

    • They anticipate redemptions in the future and prefer to have ready cash rather than sell in panic later.

    As the markets stand today, it is not hard to fund the reason for equity funds preferring cash to stocks. As markets continue to remain volatile and depressed, some funds prefer to play it safe by parking funds in cash/call rather than expose the fund to the volatility of equity markets. In a market where posting even single digit growth in an equity fund can be a vexing proposition, fund managers have to look at other means to clock growth and suppress the erosion of assets. Cash fits into this bill rather nicely. But a question topmost in the minds of fund managers is Ďisnít the fund manager underperforming so long as he is invested in cash, rather than stocks? We have tried to answer this question below.

    Cash is king
    Benchmark 12-month returns
    BSE 30 -18%
    S&P CNX Nifty -20%
    Call money 8%
    364-day Treasury Bills 9%
    Cash (Savings A/c) 4%

    As is evident from the table above, in a depressed equity market, cash is indeed king. A lot of funds seemed to have realized that. The number of equity funds investing in call/cash in these markets should not surprise anyone. Increasingly we have seen diversified equity funds and sectoral funds alike taking to cash/call to salvage their net assets from certain depletion. While Treasury bills and call money markets are more attractive, nothing can substitute the comfort of liquidity that cash offers.

    Equity funds make beeline for Cash
    Equity funds Cash/Call allocation
    PRU ICICI BAL 55.6%
    HDFC TAX 2000 40.2%
    PRU ICICI FMCG 18.9%
    ILFS GROWTH & VALUE 18.5%
    DUNDEE TAX SAVER 16.0%
    (Data from latest fact sheets)

    All kinds of equity funds are investing in cash. We have a diversified fund (ILFS Growth and Value), a balanced fund (Pru ICICI Balanced), a sectoral fund (Pru ICICI FMCG Fund) and a tax saving fund (HDFC Tax Saver). (Note that the above sample is representative and not exhaustive)

    So remaining invested in cash in not such a bad thing. As an investor you have to see whether equity markets present the opportunities that should make the fund manager invest in stocks. In other words, equity markets must be firm and the sentiment should be bullish. If despite that the fund manager remains invested in cash/call, you know that he is collecting his fund management fees from you for what you can do in any case. However, if there is a market like we are witnessing at the moment, then you know you have the right guy for a fund manager.

     

     

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