Equity mutual fund schemes keep powder dry amid volatile markets

Active equity schemes held nearly Rs 1.7 trillion in cash at the end of October

Equity mutual fund (MF) schemes remain flush with cash despite having deployed a record sum over the past five weeks, amid a 10 per cent downturn in the benchmark National Stock Exchange Nifty.

 

As of the end of October, equity schemes from the top 20 fund houses were holding 5.5 per cent of their portfolios in cash, compared to 6 per cent in September, according to a report by Motilal Oswal Financial Services.

 

PPFAS, Quant, and SBI were the top three in terms of cash holdings. These 20 fund houses manage around Rs 28.5 trillion through their equity schemes. At 5.5 per cent, the total cash holding amounts to Rs 1.6 trillion. Assuming a similar cash percentage industry-wide, the absolute cash holding for the sector would be around Rs 1.7 trillion.

 

While MF executives maintain that their mandate is to remain fully invested, they strategically maintain some cash reserves during periods of market uncertainty and excessive valuations.

 

Industry players suggest that while the market has come off sharply, valuation levels have not dropped much due to slower earnings growth. 

 

“While there has been some moderation in valuations and equity market sentiment, we believe there may be more room for the current market turbulence to play out before we reach more reasonable levels in both,” SBI MF said in a recent note.

 

The fund house outlined three key factors behind the market downturn: “One, valuations for Indian stocks have been rich, both on an absolute basis and relative to emerging market peers. Two, near-term earnings have been slowing, and earnings revisions suggest that more stocks are seeing downgrades than upgrades. Three, our measure of equity market sentiment had remained extremely stretched.”

 

Cash holdings also depend on the quantum of inflows and outflows from schemes at the end of the month. In October, investors poured Rs 41,887 crore into active equity schemes, the highest recorded in any calendar month.

 

The inflows into equity MF schemes, combined with the cash positions, determine the extent of MFs’ equity market deployment. MFs and other domestic institutions were key supporters of the market last month amid a record outflow of foreign capital.

 

In October, MFs purchased a record Rs 90,771 crore worth of equities across active equity, passive equity, and hybrid schemes. This deployment occurred during a 6.2 per cent drop in the benchmark Nifty 50.

 

The report also reveals that not all MFs were putting their cash to use last month, with several fund houses reporting an increase in their cash holdings. Fund houses that saw a rise in cash holdings include SBI, PPFAS, and Axis. Motilal Oswal, ICICI Prudential, and Quant, on the other hand, were among those that likely deployed a sizeable portion of their cash holdings last month.

 

Changes in cash levels are also influenced by changes in the overall fund size due to market movements. Even if cash holdings remain constant, a decline in the overall assets under management of equity schemes due to a market fall will result in a higher cash level.