 "Equity MF schemes stockpile cash in response to sky-high valuations")
The cash held by equity mutual fund (MF) schemes went up sharply in July amid after-Budget volatility and concerns about elevated valuations. Strong inflows into new fund offerings (NFOs) also kept cash levels elevated.
Equity MF schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore in cash at the end of July 2024, up 27 per cent from the June-end tally of Rs 62,700 crore, according to a Motilal Oswal report.
As a result, the aggregate proportion of cash in these schemes rose to a 15-month high of 5.4 per cent. In June, cash accounted for 4.6 per cent of the portfolios.
According to MF executives, while the mandate is to stay fully invested, they have the leeway to keep funds available during times of uncertainty or excessive valuations.
Although valuation concerns, especially in the midcap and smallcap space, have persisted for nearly a year, equity MF schemes have continued to attract robust flows on a sustained basis. The market, supported by MF inflows, has been on an extended bull run.
In July, the equity market delivered strong performance despite the Union Budget delivering a negative surprise by raising the capital gains tax on equities.
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Benchmark indices National Stock Exchange Nifty 50 and S&P BSE Sensex ended the month with gains of 3.9 per cent and 3.4 per cent, respectively.
As of August 14, the Nifty 50 was trading at a 12-month forward price-to-earnings (P/E) ratio of 20.2x compared to its five-year average of 19.3x.
The P/E ratio of the Nifty Midcap 100 stood at 32.9x, vis-à-vis a five-year average of 24.3x. The Nifty Smallcap 100 was trading at a P/E of 20.6x compared to the five-year average of 17.2x.
“In P/E terms, the Nifty 50 is trading at 89 per cent premium to the MSCI Emerging Markets Index, above its historical average of 50 per cent,” Tata MF said in a note.
Volatility in the global market in August amid slowdown concerns in the US has added to fund managers’ worries. Earlier this month, the markets posted their worst single-day fall since the election result day on June 4.
“The global selloff comes against the backdrop of rich valuations and stretched sentiment readings on our proprietary indicator for Indian equities. The sentiment index works as a contrarian measure and has an inverse correlation to expected forward returns, especially at extremes, as is the case now. Further, while we stay constructive on earnings in the medium term, the near-term trajectory has been decelerating as commodity price tailwinds abate. This mix, we believe, is ideal for a reduction in the thus-far-unabated speculative action in equity markets,” SBI MF said in a note.
According to the Motilal Oswal report, Parag Parikh Financial Advisory Services (PPFAS) MF had the highest cash holding at 16.1 per cent, followed by Quant MF, which was 14 per cent in cash. While PPFAS MF has been holding on to high cash levels for several months now, Quant MF’s cash holding was only 7.2 per cent in June. Other fund houses that have seen over a 1-percentage-point rise in cash holding include ICICI Prudential MF, Franklin Templeton MF, Sundaram MF, and Motilal Oswal MF.
SBI MF and Aditya Birla Sun Life MF were among the few fund houses that saw a considerable dip in cash holding.
MFs have been facing deployment challenges, especially in the smallcap space, as few funds invest in emerging sectors owing to the continued flow of fresh investments even as valuations have run up sharply.
According to experts, the strong collections in NFOs in July may have contributed to the cash holdings. They say that fund managers deploy the proceeds in a staggered manner if the collection is large.