Equity funds play it safe

Instead of entering the stock markets at low levels, fund houses are playing it safe. Fund managers are maintaining up to 25 per cent cash levels in their equity and equity-related schemes and buying stocks selectively.

Equity mutual funds are sitting on total cash levels of around Rs 6,796 crore as on July 31. Of all the equity schemes, the diversified equity schemes are sitting on cash to the tune of Rs 5,439.70 crore (5.96 per cent on an average). The diversified equity schemes pick stocks of different companies across sectors.

Consider the numbers: On July 27, the Sensex tanked by 542 points. A day after the monetary policy review (August 2), the benchmark index suffered a fall of 615 points.

On August 9, the index shed early gains to end down by nearly 208 points. On August 10, the Sensex tanked by 232 points. With such volatility in the market, caution is the buzz word for most fund managers.

"Equity mutual funds had cash levels of up to 5 per cent of their total assets as of June-end. However, after the market volatility set in, mutual funds are being more cautious. They are maintaining consolidated levels between cash, bonds and equity," said Subhash Bagaria, research associate-mutual funds, Angel Broking.

There are fund houses like DBS Cholamandalam that have no cash positions in any equity fund. "We don't believe in the philosophy of sitting on cash. Currently, we have no cash positions in any of our equity funds," said R Rajagopal, chief investment officer, DBS Cholamandalam.

Equity funds that invest in the banking sector have 14.61 per cent exposure to cash on an average, as of July 31. Typically, funds have 7 to 8 per cent exposure to cash. "Sectoral funds typically don't sit on cash since they don't have the flexibility of an equity diversified fund to invest in different sectors. So if there is a small rally in banking stocks, they would be badly butchered," said Sameer Kamdar, country head-mutual funds, Mata Securities.

The last two months have seen a flurry of new fund offerings (NFOs), including SBI Infrastructure Fund, Franklin India High Growth, DSPML Micro Cap and others, that have mobilised nearly Rs 8000 crore. These NFOs are investing money but not at once, say analysts.

"The NFOs that have come so far are investing but not all at once. For instance, the SBI Infrastructure Fund collected in excess of Rs 1,500 crore through their new fund offering. However, they have deployed only about 60 per cent of it so far. Equity funds are keeping cash in hand so that if there is a downside move again, they can deploy cash," said Bagaria.

However, mutual funds have started buying in the last couple of trading sessions. Since the beginning of August, mutual funds have been net buyers in most trading sessions, according to Sebi data.

"Mutual funds have started buying stocks now. While NFOs typically sit on higher levels of cash as compared to existing equity fund offerings, they may start deploying cash at around the 14000 levels," said Kamdar.