Heightened market volatility has put several fund managers in a dilemma, with industry estimates showing cash levels in several equity funds rising 10-30 per cent in March.
According to industry participants, certain fund managers are betting on markets to correct further, and deploying funds at lower price points. At an aggregate level, of the Rs 1.15-trillion asset base of large-cap funds as on March 31, 2020, about 5.7 per cent was held in cash and cash equivalents. Cash levels rose 160 basis points (bps), from 4.1 per cent in February.
In large- and mid-cap funds, cash levels have inched higher by 130 bps. At the end of March, of the Rs 42,984-crore asset base, 3.7 per cent was parked in cash and cash equivalents.
Taking large cash calls, say industry players, can also put equity schemes at risk of underperformance, if markets bounce back instead of seeing further deep correction.
“If markets see further deep correction, these funds will be able to gain from deploying funds at lower price points. But the strategy can backfire if markets bounce back and end up hurting returns, instead of optimising them,” said senior executive of a fund house.
At an aggregate level, of the Rs 5.79-trillion equity assets in the industry, Rs 28,882 crore was held in cash and cash equivalents. This translates into 5 per cent cash levels, rising from 4.7 per cent in February.
Incidentally, the cash percentage is the highest in six months.
According to industry estimates, several schemes in large-caps, mid-caps, and multi-caps are sitting on cash levels between 15 per cent and 30 per cent.
“While certain individual cash positions are much higher in small-cap funds, not many funds have taken cash calls, as fresh investor flows had already been weak in such funds or subscriptions had been suspended in popular schemes,” said a fund manager.
The sharp volatility in the markets amid the virus outbreak has also led to a massive fall in the benchmark indices.
In March, the Nifty had declined as much as 30 per cent, falling to as low as 7,801 points. However, the Nifty has also seen some recovery from these levels, gaining 15 per cent.
“Fund managers take tactical cash calls to optimise returns. Sometimes they work, other times, they don’t. One school of thought says it may not be prudent for fund managers to take cash calls, as investors give funds with the mandate to be invested,” said Dhirendra Kumar, chief executive officer of mutual fund tracker Value Research.
“Fund managers can be caught off-guard with such a strategy, as past experiences have shown it is very difficult to spot market bottoms and deploy cash, and market reversals can also be swift in a volatile environment and cause massive underperformance,” said chief executive officer of a fund house.