Majority of equity schemes pare cash positions even as markets soar

While the market may remain volatile this year, analysts expect equities to deliver positive returns by outperforming inflation and government bonds, supported by the fiscal stimulus in the US.

Equity schemes have not gone heavy on building a cash buffer despite the steep run-up in equities over the last couple of months (which propelled the benchmarks to record highs), and rich valuations.

According to data from Value Research, two-thirds of 265 equity schemes considered for analysis were found to have decreased their cash positions over the past one year.

Of these, 29 have decreased their cash position by more than 5 percentage points, while 11 have done so by over 10 percentage points.

As of December-end, 31 schemes had cash levels in excess of 5 per cent, compared to 65 schemes a year ago.

According to experts, schemes sitting on a lot of cash deployed it after the market crash in March and April.

Quantum MF, for instance, used the market crash to add new names to its portfolio at attractive valuations and bring its cash level down to less than 5 per cent by March 2020 from 9 per cent at the beginning of the year.

“The focus was to ensure we add high-quality companies in terms of balance sheet strength and management capability, which would survive the impact of a prolonged lockdown.

"We had also done a stress-test of our portfolio to ensure all investee companies had adequate cash and low leverage," said Nilesh Shetty, fund manager, Quantum AMC.

After July, however, lockdowns subsided and it became clear that the damage to the economy would not be as bad as earlier anticipated.

Foreign portfolio investors (FPIs) became net buyers again, while domestic fund managers realised the liquidity-driven rally was here to stay.

“The general view is that this is a liquidity-driven rally that is likely to sustain thanks to the deluge of inflows from overseas investors,” said Swarup Mohanty, CEO of Mirae Asset MF.

He clarified that bulk of the recent selling by MFs was driven by redemption pressure from investors, and not done with the objective to raise cash levels.

According to experts, taking cash calls is a dilemma that equity fund managers grapple with, especially in times of volatility.

It is a strategy that goes against the fundamental tenet of staying invested at all times.

However, it is employed either to protect the downside in the event of a market fall, or to avoid paying a high price for a stock.

Most equity schemes, however, do not take active cash calls based on the assumption that investors have done their asset allocation and want to remain fully invested.

“Taking cash calls may be prudent when the market has been moving sideways, or there is a big event on the horizon that could change sentiment.

"Such calls, however, could backfire when there is a secular bull run,” said Umang Thaker, head (products), Motilal Oswal Asset Management.

Cash levels may not have risen substantially but fund houses have rejigged their portfolios following the recent rally.

“We have booked profits in select names due to expensive valuations and resized weighting in certain stocks based on risk perception,” said Quantum MF’s Shetty.

He says Indian equities remain attractive and investors should avoid trying to time their market entry and exit.

SIPs remain the simplest way to tide over market cycles, added Shetty.

While the market may remain volatile this year, market watchers expect equities to deliver positive returns by outperforming inflation and government bonds, supported by the fiscal stimulus in the US.

The upcoming Budget and earnings growth will also provide near-term cues for market direction.