The Indian equity market has witnessed growing turbulence, with steep fluctuations in benchmark indices and sectoral fluctuations. They include persistent geopolitical uncertainty, rising crude oil prices, heavy selling by FIIs and fear of global recession that have created a questionable investment environment.
Given the challenging conditions, some mutual fund managers have taken a cautious approach by raising cash holdings in their portfolios.
This strategic realignment isn’t merely a defensive step — it’s a deliberate attempt to conserve capital while getting ready for new investment prospects in case of a potential market correction. By holding higher cash positions, these fund managers can constrain risk on the downside and stay agile as valuations improve.
ALSO READParliamentary panel to review stakeholder comments on new I-T Bill
But there may be no apparent trend or shared approach to this move. Some may be holding higher cash levels on a short-term basis, and others may have a longer-term defensive strategy. Understanding these forces can help investors make better-informed decisions in uncertain markets.
This article examines the logic behind this action, identifies five prominent mutual funds with high cash levels, and discusses what investors need to keep in mind before investing in these funds.
Why Have Mutual Funds Increased Cash Holdings?
Several factors have contributed to this defensive shift by fund managers:
- Valuation Concerns: Valuations in equity in certain industries like IT, FMCG, and financials have remained at record high levels. Fund managers may prefer waiting for more favourable entry points rather than risking exposure at high valuations.
- Market Volatility: Geopolitical tensions, inflation fears, and uncertain economic indicators have led to increased volatility. Under such circumstances, fund managers would rather stay in cash than be exposed to volatile market segments.
- Profit Booking: Certain funds have opted to book profits following extended market rallies, transferring gains to cash reserves until fresh investment opportunities arise.
- Sector Rotation Strategy: Funds can opt to leave overpriced sectors and hold cash in the short run before investing in promising sectors that have higher growth prospects.
- Liquidity for Flexibility: Holding cash reserves enables fund managers to take advantage of market corrections or purchase stocks at favourable prices.
- Event-Driven Risk Management: Political developments, changes in the global economy, or key corporate events may encourage funds to take a wait-and-watch attitude, raising cash balances in the meantime.
Given these reasons, fund managers have to balance risk management and performance results carefully.
» Read More
