MFs keep the powder dry as Nifty nears 'correction', cash holdings rise

Cash holdings of equity schemes at top 20 funds rise to 6.2%; in at least four, the holdings are above 10%

Mutual funds' average cash holdings in equity schemes topped 6 per cent in February as fund managers went slow on deployment of new inflows on expectations of better buying opportunities amid uncertainties in the market.

"Right now our cash holding is at a higher level. We never force ourselves to buy stocks as and when fresh money comes in. Market has been choppy and we have been waiting for the stock prices to come to our target levels. As and when the opportunity arises, we will deploy the cash," said Rajeev Thakkar, Chief Investment Officer and Director, Parag Parikh Financial Advisory Services (PPFAS) MF, which has the highest cash holding in equity schemes (14 per cent) among the top 20 fund houses.

Cash levels in equity schemes have been rising consistently since May 2021, when the average cash holding of equity schemes of top 20 fund houses stood at 3.2 per cent, shows Motilal Oswal Investment Services' fund folio report. The February 2023 level of 6.2 per cent is the highest for the period for which data is available (May 2021 to February 2023).

Apart from PPFAS MF, three other major fund houses — Axis MF, PGIM India MF and SBI MF — were holding cash in excess of 10 per cent at the end of February, the report shows.

The decision to increase cash levels amid sustained inflows has proved to be wise. The Nifty has tanked close to 7 per cent so far this calendar year. The benchmark index is on the version of ‘correction’ having declined 9.78 per cent from its all-time closing high of 18,813 on December 1.

Equity market has remained choppy for almost a year and a half over geo-political issues, interest rate hikes, global slowdown concerns, outflow of foreign investments and comparatively higher valuations.

Fund managers expect the market to tread sideways or even decline more in the next few months, allowing them to buy stocks at a better valuation.

"The third quarter results indicate some downtick in earnings and we believe that there will be another quarter of opportunities to invest in good businesses at more reasonable valuations," Aniruddha Naha - head of equities — PGIM India Mutual Fund, said in an interview earlier this month.

The third-quarter results failed to deliver any major positive surprises for the market. An analysis of the 'early bird' results by Business Standard showed a slowdown in corporate earnings and revenue growth. The combined net profit of 225 early bird companies across sectors was up 2.5 per cent year-on-year (YoY) in the third quarter of 2022-23 but this was the least increase in 10 quarters. The non-BFSI (banking, financial services, and insurance) sectors fared poorly as their combined net profit declined 8.5 per cent YoY, the second consecutive quarter of a decline in earnings.

The higher cash levels are also partly a result of continued flow of retail money into mutual funds, irrespective of the market condition. Collections through the systematic investment plan (SIP) route have remained above Rs 10,000 crore since September 2021. In February, the inflows stood at Rs 13,686 crore, data from the Association of Mutual Funds in India (Amfi) shows. Together the SIP and inflows have ensured higher cash levels with MFs even as they have deployed record sums of money in the equity market. The net investments by MFs in equities have now remained above Rs 1.5 trillion for two consecutive financial years.

Apart from the broader factors like interest rate hikes and higher valuations, the Indian market has suffered from specific sector or company specific factors in the present calendar year. In January, a scathing report on Adani group stocks by short seller Hindenburg Research led to a sharp decline in stocks of Adani group companies and its lenders, wiping out billions in market capitalisation. This month, the crisis at the Silicon Valley Bank has spooked the market.