Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Mutual funds are cashing in - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • 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%
    (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.



    Equitymaster requests your view! Post a comment on "Mutual funds are cashing in". Click here!


    More Views on News

    The Right Financial Advisor Is Around the Corner (Outside View)

    Mar 10, 2016

    An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

    Why financial planning should be dull and boring (Mutual Fund Corner)

    Feb 29, 2016

    Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

    What Are E-Wallets And How To Use Them (Mutual Fund Corner)

    Feb 12, 2016

    PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

    Is Consumption Boom Over In India? (Mutual Fund Corner)

    Feb 2, 2016

    Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

    How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

    Feb 1, 2016

    Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms