Mutual Funds with Higher Cash Holdings Amid Volatility in the Market: Safe Haven or Lost Opportunity?
Indian share market has been witnessing fluctuation for reasons like rising crude oil prices, withdrawal of money by foreign investors, spectre of a global slowdown, and geopolitical tensions. As a result of this volatility, mutual fund managers are taking a cautious route by keeping additional cash within their funds instead of putting money wholly into stocks.
It is not just a vehicle for protecting the fund from loss but also a plan to keep money in reserve to invest in the future in case the market goes down. With more cash, managers can minimize risk and benefit from cheaper stock prices in the future.
Not all funds, however, do it the same. Some may hold more cash for only a short time, while others hold it as a long-term approach. Understanding why funds do this can help investors make better decisions during disturbed market times.
Why are Mutual Funds Holding more Cash?
There are several reasons why mutual funds are keeping more cash:
- High prices of stocks: Prices of stocks are extremely high in industries such as IT, FMCG, and financials. Fund managers might like to wait for some other chance rather than invest at these rates.
- Uncertainty in the market: With global economic worries, inflation, and unpredictable indicators, the stock market today is uncertain. Some funds would rather retain their money as cash instead of investing it in such volatile stocks.
- Booking of profits: With a long history of the growth of the stock market, some funds have booked the profits by selling the shares and have the money in cash form waiting for them to find better opportunities for investment.
- Sector rotation: Some funds are exiting high-cost sectors and waiting with cash until they get sectors with more promising growth prospects.
- Flexibility: Cash can enable fund managers to purchase stock at cheaper prices when the market is down.
- Waiting to see what happens: Policy changes, shifting global economies, or major business occurrences can cause fund managers to hold cash until the situation becomes clearer.
While this strategy minimizes risks, it also affects the performance of the fund, depending on the timing and method of use of cash.
How does Additional Cash affect Investors?
Having more cash in mutual funds is both positive and negative. Here is how additional cash affects investors:
1. Lost profits: When the stock market unexpectedly rises, cash-loaded funds will lose profits since they are not completely invested in stocks. This can lower investor returns, particularly when the market is rising.
2. Slower growth: Cash earns less than stocks. If a fund holds too much cash in the long term, it cannot beat other funds or market indexes.
3. Falling short of investment objectives: Investors invest in growth-hoping equity mutual funds. When a fund always holds a greater proportion of cash than it invests and fails to invest proportionally, it can fail to meet the investor’s expectations.
Investors can invest better by monitoring how the managers of a fund handle cash and whether they are following a similar strategy that serves their investment objective.
Only some of the mutual funds have significantly raised cash investments, as they are showing prudent action while handling the market.
1. Motilal Oswal Midcap Fund: Increased cash investment from 24.38% in January to 28.33% in February 2025.
The fund is holding more money since the nature of midcap shares is extremely volatile, as a precaution against risks. But if the mid-cap returns in force early, this move will mean sacrificing gains.
2. Helios Large and Mid Cap Fund: The fund took huge cash positions from 2.78% in January to 23.31% in February 2025. Such a steep increase shows that the fund is switching to a defensive mode to an extreme extent, perhaps due to fear of market volatility. Since these are large and mid-cap funds, these funds will typically have larger quantities of stocks held. The accumulation of such large cash may imply that the fund is hoping for the stock prices to fall.
3. Helios Flexi Cap Fund: The fund also increased its cash holding from 1.69% to 20.59% during the period. Flexi-cap funds invest in large and small-cap stocks, hence maintaining higher cash is an unusual move. This means that the fund manager is hoping for a better opportunity to buy.
4. Kotak Transportation and Logistics Fund: The sector-specific fund’s cash holding went up from 12.57% in January to 19.43% in February 2025. This could be because of issues in the transportation and logistics industry, including an increase in fuel prices, disturbance in international trade, or decreased consumer expenditure.
5. Samco Special Opportunities Fund and Bandhan Focused Equity Fund: Both these funds witnessed a significant rise in the percentage of cash. Samco Special Opportunities Fund increased cash from 2.14% to 17.91%, while Bandhan Focused Equity Fund increased from 9.04% to 13.32%. This is an indication that fund managers are being cautious, either waiting for better investment prospects or dealing with short-term market fluctuations.
Conclusion
Most flexi-cap, sectoral, and midcap funds are taking higher cash positions as a defensive strategy in turbulent market situations. Although this would mitigate risk, investors need to be certain whether it is in their risk appetite and investment objective.
By noting the way the funds are dealing with their cash, investors can make better decisions about being invested or moving to funds with a more aggressive investment strategy.
