Cash conundrum
Equity funds typically maintain around 3-5% in cash to provide for liquidity. Occasionally some funds are known to hike cash allocations beyond 10%, stretching up to 25-30%. Some use it as a ploy to protect returns in anticipation of a market decline. Others shore up cash reserves as ammunition for entering at lower prices.
Funds that moved to cash early have cushioned the fall
How these funds reinvest during a rebound shapes long-term results.
PPFAS Mutual Fund’s CIO, Rajeev Thakkar, is among the prominent fund managers who occasionally beefs up cash allocation in his portfolio. PPFAS Flexi Cap was sitting on 18.7% cash (including arbitrage positions) at the end of September 2024. In his November letter to the fund house’s unitholders, Thakkar explained his view on cash calls. “We are playing test cricket and not a T20 game. Not losing our wickets is more important than hitting six. We will wait for a loose ball to try and hit a boundary rather than swing our bat at every ball that is bowled,” he remarked.
What Thakkar means is that he doesn’t see equity investing as a sprint. He doesn’t chase quick gains or keep buying stocks at just about any price. Thakkar waits for his opportunities. And that’s where his cash pile comes in handy. Thakkar’s fund continued to hold 22.7% cash at the end of February 2025.
Other fund managers have their own reasons for piling into cash. Quantum Mutual Fund has often taken hefty cash positions. George Thomas, Fund Manager-Equity, Quantum Mutual Fund, insists that the cash calls are not a conscious choice—rather an outcome of internal risk controls. “In a rising market, when some stocks breach our fair value estimates, we trim positions, which swells the cash in the portfolio. It is simply about managing risk in our portfolios.”
Shreyas Devalkar, Head Equity, Axis Mutual Fund, concurs. “Cash is an outcome of managing excessive valuation risk (in high growth themes and stocks) and low growth risk (in low valuation stocks). As we find the right ideas, we continue to deploy.”
Cash can backfire, too
However, most fund managers consciously avoid taking cash calls, for various reasons. They counter that parking in cash is not what a typical equity investor desires. Gaurav Misra, Head of Equity, Mirae Asset Investment Managers, asserts, “It is like second-guessing the investor’s asset allocation. Once he has given us the money to put in equities, we would rather fulfil that mandate. There are other products in the market that can offer asset allocation if the investor seeks.”
Many funds have beefed up cash reserves
With market slide not letting up, many funds have piled into cash.
Invesco Mutual Fund’s CIO, Taher Badshah, contends, “The investor is paying us to put his money to work. Besides, the fund is benchmarked against the index, which is fully invested at all times. So it doesn’t make sense to take cash calls within the fund.” Badshah prefers taking quasicash positions instead, such as investments in defensives or low-volatility stocks that can cushion the downside better.
Critics argue that cash often acts as a drag on return if the call goes wrong. Devalkar and Thomas don’t see it that way. “More than cash holdings, the stock holdings, which form the bulk of the portfolio, determine the outcome,” Devalkar argues. Thomas insists that he favours capturing lower market downside via cash rather than enjoying the entire market upside from remaining fully invested. “Our cash position typically means we miss the tailend of a market rally. But we don’t mind it, as this phase is often characterised by expensive stocks turning even more expensive.”
Beyond this, critics say pulling off cash calls is very tricky. When the cash call comes off, it seems like the smart thing to do in hindsight. But when it doesn’t, the fund manager can be caught off-guard. When taking a cash call, the fund manager has to get two sides of the equation right—getting into cash near the market top and deploying quickly near the market bottom. Even if a fund times the peak right, it’s usually tough to get back into the equity markets in time to catch the upside. Misra remarks, “Full credit to those who get it right, but market dynamics today are very fluid, which makes getting that call right very tricky.” Misra points to the swift rebound from the lows of March 2020, which left investors with only a narrow window of opportunity. Those who remained in cash got left behind.
Badshah says, “Reinvestment risk is bigger than the saving from being in cash on the downside. Being able to redeploy can be challenging at times. One has to be on the ball every time.”
PPFAS Mutual Fund has got a few cash calls right, but there is no assurance it will hit the mark every time. Today, Quantum Long Term Equity Value sits at the top of the six-month performance charts in its category, having consistently parked in excess of 10% in cash since May last year. But Quantum Mutual Fund is only painfully aware of the perils of an ill-timed cash call. For long stretches of time, between 2014 and 2018, its flagship fund remained underinvested, deeming valuations too expensive amid tepid earnings growth. But the market continued to rise, leaving the fund at the bottom of the return charts for years. Yet, the fund manager insists it would not accept the risk of a style drift to catch up with the market.
Is cash good or bad for your mutual fund?
Most experts are against the practise of cash calls, irrespective of its benefits amid a market correction.
Arun Kumar, Head of Research, FundsIndia, says that apart from the challenge of market timing, he reckons such a call is contradictory. “How can you be positive on, say, 80% of your portfolio but negative for the remaining 20%?” he questions. “It adds unnecessary complications for the investor if several funds in the portfolio take cash calls separately, putting the investor further underweight on equities on top of his own cash allocation,” Kumar adds.
Kaustubh Belapurkar, Director of Fund Research, Morningstar India, also reckons taking cash calls is not the mandate for pure equity funds. If the fund must do so, it is only fair that the intent is stated upfront as an objective and known to investors, he insists. Experts caution against getting carried away by the near-term outperformance of funds that are sitting on cash.
Kumar asserts, “The actual benefits will only be clear when the entire market cycle plays out, depending on the fund getting the call right at both ends.”
That just might be too late for you.