Market Turbulence Pushes 63% Of Mutual Funds To Increase Cash Holdings

The mutual fund sector in India is becoming more defensive with the market volatility compelling fund managers to build up liquidity buffers.

Statistics indicate that approximately 63% of mutual fund houses increased their cash holdings in February, which is an indication of moving towards caution in uncertain market conditions.

Out of 48 fund houses analysed, 30 increased their cash allocation, while total cash held by equity mutual funds rose to ₹1.36 lakh crore, accounting for about 2.62% of total equity assets under management (AUM).

Why Are Fund Managers Increasing Cash Holdings?

The increase in market volatility and issues in valuation have prompted most fund managers to shift to a defensive allocation strategy. Maintaining more cash will enable fund managers to:

• Reduce downside risk during uncertain phases.

• Maintain flexibility to deploy capital during market corrections.

• Avoid investing aggressively at elevated valuations.

At the same time, a portion of the increase is linked to fresh inflows from new fund offers (NFOs). Around ₹5,357 crore raised via NFOs has been temporarily added to cash balances, as this capital is gradually deployed into equities.

Which Fund Houses Increased Cash Exposure?

Some of the biggest asset management firms greatly expanded their liquidity holdings:

• SBI Mutual Fund raised cash holdings by around 21%.

• Quant Mutual Fund saw a sharp 219% jump.

• ICICI Prudential Mutual Fund increased cash levels by about 22%.

In absolute terms, some of the highest cash holdings were:

• SBI Mutual Fund: ₹26,101 crore (Feb) vs ₹21,503 crore (Jan).

• ICICI Prudential MF: ₹15,514 crore vs ₹12,683 crore.

• Quant MF: ₹5,210 crore vs ₹1,634 crore.

• DSP Mutual Fund: ₹5,030 crore vs ₹4,088 crore

• Kotak Mahindra Mutual Fund: ₹4,592 crore vs ₹3,569 crore

Which Fund Houses Reduced Cash?

Not all fund managers turned defensive. Others planned to use capital regardless of volatility:

• HDFC Mutual Fund reduced cash by around 30%.

• Motilal Oswal Mutual Fund cut exposure by about 48%.

• PPFAS Mutual Fund lowered its cash by around 29%.

This divergence indicates varying perceptions on valuations and market opportunities among fund managers.

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What Does This Mean For Investors?

To investors, an increase in cash in the equity mutual funds indicates a strategic change as opposed to a long-term negative bet on markets. The fund managers are also becoming picky and do not want to be caught holding on to their liquidity until the better deals come along.

This will be useful in capping downside risk in volatile periods, as well as positioning funds to capitalise on market corrections. For long-term investors, it indicates that fund managers are actively managing portfolios to balance risk and opportunity, rather than staying fully invested at all times.

Sources:

Zee Business

Money Control