A DOUBLE-EDGED STRATEGY?

Mutual funds: A cash-smart cushion in crashes or costly hesitation in rallies?

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Over the past decade, mutual funds have emerged as a popular vehicle to invest in the financial markets, especially equities. Among the many benefits that mutual funds bring to the table, transparency makes them a go-to product for many small investors. Regular information sharing by mutual fund houses has ensured that investors become more confident about mutual funds compared to most other pooled money management arrangements.

Among the various data points shared by mutual funds, cash held at the scheme level is a key statistic observed by many analysts. It is usually shared in the monthly fact sheet of a mutual fund house and mentioned in both absolute and percentage terms in the context of the overall assets under management (AUM) of the scheme. For example, if a scheme has ₹1,000 crore in AUM and it maintains cash of ₹10 crore, then the cash level can be expressed as 1% as on the date of disclosure, say 30th Apr ‘25.

Before we get into the implications of cash held, let us first understand why fund managers hold cash or why portfolio disclosures show cash held by schemes.

Actively managed schemes expect fund managers to allocate cash to select securities in such a manner that, over the medium to long term, they outperform the benchmark of the scheme. This can be done in three ways: either a fund manager can select stocks and securities that are expected to generate better returns than the benchmark in an uptrend, select those that are expected to fall less than the benchmark, or use a combination of the two.

In this pursuit, a fund manager may hold cash if they do not find investment-worthy stocks at attractive levels. They may also choose to stay in cash if they expect the markets to decline, thereby offering stocks at cheaper prices. Cash levels can also rise if there is a development that impacts a large sector or a significant portion of the portfolio, prompting the fund manager to exit some stocks completely or partially.