The cash with equity mutual fund (MF) schemes went up sharply in July amid post-Budget volatility and concerns around elevated valuations. Strong inflows into new fund offerings (NFOs) also kept cash levels elevated.
Equity mutual fund (MF) schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore in cash at the end of July 2024, up 27 per cent from the June-end tally of Rs 62,700 crore, shows a Motilal Oswal report.
As a result, the aggregate proportion of cash in these schemes rose to a 15-month high of 5.4 per cent. In June, cash accounted for 4.6 per cent of the portfolios.
According to MF officials, while the mandate is to stay fully invested, they have the leeway to keep the powder dry during times of uncertainty or excessive valuations.
While the valuation concerns, especially in the midcap and smallcap space, have been there for almost a year now, equity MF schemes have continued to attract robust flows on a sustained basis. The market, supported by MF inflows, has been on an extended bull run.
In July, the equity market delivered a strong performance despite the Union Budget delivering a negative surprise by raising the capital gains tax on equities. Benchmark indices Nifty 50 and Sensex ended the month with 3.9 per cent and 3.4 per cent gains, respectively.
As of August 14, the Nifty 50 was trading at a 12-month forward price-to-earnings (PE) ratio of 20.2x compared to its five-year average of 19.3x. The PE ratio of the Nifty Midcap 100 stood at 32.9x vis-à-vis a five-year average of 24.3x. The Nifty Smallcap 100 index was trading at a PE of 20.6x compared to a five-year average of 17.2x.
“In PE terms, the Nifty 50 is trading at ~89 per cent premium to the MSCI EM index, above its historical average of ~50 per cent,” Tata MF said in a note.
The volatility in the global market in August amid slowdown concerns in the US has added to the worries for fund managers. Earlier this month, the markets posted their worst single-day fall since the election result day on June 4.
“The global selloff comes in the backdrop of rich valuations and stretched sentiment readings on our proprietary indicator for Indian equities. The sentiment index works as a contrarian measure and has an inverse correlation to expected forward returns, especially at extremes, as is the case now. Further, while we stay constructive on earnings in the medium term, the near-term trajectory has been decelerating as commodity price tailwinds abate. This mix, we believe, is ideal for a reduction in the thus-far-unabated speculative action in equity markets,” SBI MF said in a note.
According to the Motilal Oswal report, Parag Parikh Financial Advisory Services (PPFAS) MF had the highest cash holding at 16.1 per cent, followed by Quant MF, which was 14 per cent in cash. While PPFAS MF has been holding on to high cash levels for several months now, Quant MF’s cash holding was only 7.2 per cent in June. Other fund houses that have seen over a one percentage point rise in cash holding include ICICI Prudential MF, Franklin Templeton MF, Sundaram MF, and Motilal Oswal MF.
SBI MF and Aditya Birla Sun Life MF were among the few fund houses that saw a significant dip in cash holding.
MFs have been facing deployment challenges, especially in the smallcap space and a few funds that invest in emerging sectors, owing to the continued flow of fresh investments even as valuations have run up sharply.
According to experts, the strong collections in new fund offerings (NFOs) in July may have added to the cash holdings. They say that fund managers deploy the proceeds in a staggered manner if the collection is large.
First Published: Aug 14 2024 | 5:16 PM IST
