Equity schemes with sizeable cash holdings could miss out on the gains seen in recent market rally, as high cash calls in such funds can keep them from fully participating in the market rebound.
According to data sourced from primemfdatabase.com, as many as eleven small-cap schemes held 7 per cent of their asset base in cash at the end of June. Half a dozen large-cap schemes and 5 small-cap schemes also held over 7 per cent.
“Typically, one would not want higher cash levels in equity schemes, but largely invested portfolios. An investor can take his cash calls if he wants and there are products that allow re-balancing such as dynamic asset allocation funds,” said Kaustubh Belapurkar, director-MF research, Morningstar India.
From the March 23 lows, the market benchmark Sensex has bounced back with gains of over 41 per cent. Until that point, the 30-share index was down 37 per cent in year-to-date terms.
Experts say the downside from higher cash calls may not be seen immediately as markets have remained range-bound. “In current environment, the market rally has been driven by select stocks,” said Amit Bivalkar, founder and director of Sapient Wealth.
Industry experts say few schemes were carrying higher cash levels even in the months preceding the Covid-19 pandemic, which in some cases would have helped the mitigate impact of market meltdown that followed.
Equity funds typically carry 5 per cent of their holdings in cash and cash equivalents to meet redemption pressures.
Higher cash calls can be attributed to fund managers’ view that markets are over-valued and another round of correction can be on the cards.
Broking houses also advise caution over higher valuations.
“Valuations are no longer cheap. The Nifty is now trading at forward P/E of 20.4-times, 15 per cent premium to LPA (long-period average)”, analysts at Motilal Oswal Financial services said in a recent note.
“Valuations are reflecting recovery from H2FY21, leaving limited margin for safety for any negative surprises,” the analysts added.
Experts say fund managers should be wary as taking cash calls can put the fund down in the performance scorecard.
“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 under-performance,” said chief executive officer of a fund house.
“Within the broader universe, such as small-cap where the rally has been stock-specific, comparing the individual schemes’ performance against its benchmark would offer a clearer picture of the performance,” said Jimmy Patel, managing director and chief executive officer of Quantum Asset Management Company.