Cash holdings of mutual funds on a rise amid higher market volatility

The cash holdings of mutual funds are on a rise amid expensive equity valuations and higher stock market volatility. According to the data from Motilal Oswal Financial Services, the average cash holding as a percentage of total equity assets of top 20 mutual fund houses increased to 4.3% in December 2021 from 3.1% a year ago.

Mutual fund distributors cite elevated valuations as one of the reasons for the higher cash holding. The benchmark Nifty 50 index trades at one-year forward price-earnings (P/E) multiple of 21, which is 40% higher than its 10-year average valuation.

According to some of the distributors, fund managers are in the profit-booking phase to take advantage of the recent rally in the stock market. There is also a possibility of a weakness in the market in the run up to the Union Budget. In addition, if companies fail to meet analysts’ expectations regarding the third quarter financial numbers, selling pressure on equities cannot be ruled out. These factors have prompted fund managers to increase cash holdings.

This apart, high collections from new fund offers (NFOs) in 2021 also resulted in increased cash levels. In 2021, NFOs collected an estimated Rs 46,752.3 crore. This was the highest in a decade according to Value Research data.