This is a difficult time for fund houses as they are finding it very difficult to invest the fresh inflows when the valuation is high. Although retail investors are pouring in the money this problem still persists. The data shows that some mutual funds have up to 16% of their corpus in cash.
The CIO of Invesco Mutual Funds has come out and said that the cash holdings of their company are on the higher side, given the current high valuation. Analysts have said the high cash levels for longer periods can drag the performance of the company. As seen by the performance of Invesco India Dynamic Equity Fund this claim can be solidified.
The cash levels which are based on liquidity, market valuation, and fresh purposes don’t go beyond 6-7% in most cases. The cash levels when going higher that that level it is just for short period of time after which they go back to normal.
The CIO of Kotak Mutual Fund has summed up it in the best way saying that cash is a double edged sword, high level of it can help the company if there is a correction but it can also impact the performance when there is a strong up move.
In early 2009, the average cash holding was about 19% and it was due to the Lehman Crash as after it companies held the cash as the market was corrected sharply. As the election results came market surged and companies poured in the cash resulting in funds underperforming the benchmark during that period.
Jiju Vidyadharan, Senior director of CRISIL research has said the investors should note that higher cash holdings can impact fund returns in case the fund manager is not able to time market movements. Experts say that customers should keep checking their portfolio of funds on a regular basis. If the cash is sitting at high levels for more than two quarters then the corrective measures should be made before it gets out of hand the value drops drastically. Investment is all about being careful and a step ahead of the curve.