Mutual funds deploy dry powder to buy the dip in March, shows data

Cash holdings at top 20 asset management companies decline to 5% for month from 6.2% in Feb

Cash holdings with the top 20 mutual fund (MF) houses dropped to a 10-month low of 5 per cent in March as fund managers decided on equities, with the benchmark equities falling to their lowest levels in five months in early March.

According to a note by Motilal Oswal Financial Services (MOFSL), cash holdings as of end-February were at 6.2 per cent — the highest since May 2021.

“Equity market valuations are more reasonable today than they were in March last year. Consequently, we have lowered the cash component across most schemes,” said Anish Tawakley, deputy chief investment officer-equity and head of research, ICICI Prudential Asset Management Company (AMC).

The benchmark S&P BSE Sensex had slipped to as low as 57,085, while the National Stock Exchange Nifty stumbled below 17,000 in March in the midst of a sell-off in global equities instigated by the banking maelstrom in the US and Europe.

“Cash lying idle was deployed as valuations improved after the market came off its recent highs,” said Anand Varadarajan, business head, Tata MF.

The valuations, which had peaked in October 2021, returned to their long-term average in March 2023.

In March, the 12-month trailing price-to-earnings ratio for the Nifty50 declined to 21x, from a high of 32x at the end of September 2021.

Cash deployment was higher among fund houses that had double-digit cash holdings at the end of February, revealed MOFSL’s fund folio report.

SBI MF’s cash levels declined from 10.2 per cent in February to 9 per cent in March. In the case of Axis MF and PGIM India MF, the holdings were down 2.2 percentage points (ppt) and 6 ppt, respectively.

Data from the Securities and Exchange Board of India showed that fund houses invested a net Rs 20,760 crore in equities in March.

During the January-March quarter of 2022-23 (FY23), MFs pumped over Rs 55,000 crore into domestic stocks, up from Rs 22,700 crore in the October-December quarter of FY23.

The higher deployment of funds by MF schemes was also underpinned by strong inflows into equity schemes last month.

Net investments in active equity schemes rose to a 12-month high of Rs 20,500 crore in March, with money channelled via both systematic investment plans and one-time investments.

In March, the maximum deployment by fund managers was seen in stocks like Infosys, Reliance, HDFC, HDFC AMC, and Hindustan Aeronautics, showed a report by Nuvama Alternative & Quantitative Research.

In FY23, MF schemes saw an increase in exposure towards domestic cyclicals, with shares of private banks and automotive rising by over 1.5 per cent each.

“The weight of domestic cyclicals improved 360 basis points to 62.4 per cent, propelled by an increase in the weights of banks, automotive, and capital goods, while consumer durables, insurance, infrastructure, and chemicals moderated,” MOFSL said in the report.

The weight of defensives (technology, healthcare, and telecommunications) and global cyclicals (metal and oil) declined to 29 per cent and 8.5 per cent, respectively.

Fund managers’ bullish stance on equities can also be gauged by the change in portfolios of balanced advantage funds (BAFs). Most BAFs have raised the equity allocation at the expense of debt in recent months.