If it is for a prolonged period, check its performance vis-a-vis peers’ as well as benchmark and then take a call

If your mutual fund scheme is sitting on 20 per cent cash, is it an underperformer? Not necessarily. ICICI Prudential Dynamic Plan has returned 37 per cent in 2014 against its benchmark – Nifty’s – return of 31 per cent. The scheme was sitting at cash levels of 19 per cent in December 2014. Similarly, there are as many as 17 mutual fund schemes that are sitting on cash of 10 per cent in December. Of these, Quantum Long Term Equity Fund tops the list with cash levels of 32.49 per cent and two funds from Escorts had cash levels of 24 per cent.

Two dynamic funds from HSBC and ICICI Prudential had cash of 23.92 per cent and 19 per cent, respectively. Explains I V Subramaniam, director, Quantum AMC: “Holding cash doesn’t mean we are timing the market. We booked profits on stocks when we thought the value was good. If you look at the corporate results, nothing has changed significantly. When we see valuation change irrespective of the index levels, we will invest.” After the global financial meltdown in 2008, many equity funds kept a significant amount of portfolio in cash due to redemption pressure and market uncertainty. Those who did not deploy the cash sooner had a tough time recovering.

“Even some good funds took two-three years to better the benchmark and give returns above the category average,” says Dhaval Kapadia, director investment advisory at Morningstar India. According to Vidya Bala, head of mutual fund research at FundsIndia, mutual funds can hold high amount of cash in some situations. Mutual funds keep 20-25 per cent cash for a few weeks when markets are nose-diving like it happened in 2008. This helps them protect the downside risk.

“High cash holdings usually do not last over a quarter,” says Bala. Some dynamic funds have a mandate to stop investing when they think the market has turned expensive. For example, HSBC Dynamic Fund and ICICI Prudential Dynamic Fund say upfront that they will move to cash when they perceive valuations to be high. Mid- and small-cap funds follow this strategy often when the markets see a significant run-up. During a rising market, mid- and small-cap companies can become expensive and make the fund managers uncomfortable. These stocks are also not as liquid as say the 50 stocks in National Stock Exchange’s Nifty.

“Funds book profit in such scenario and deploy the cash they received slowly in a phased manner,” said Kapadia. From an investor’s perspective, it is important to see how long the scheme has held on to cash. If it is for a long time, say a year or so, there could be questions about the fund manager’s ability to pick stocks. On the other hand, if it is a tactical profit booking, then it is good for the scheme. Sometimes, the fund manager is forced to keep cash owing to redemption pressure. In such cases, compare the performance of the scheme with peers and benchmark. “If the scheme is holding 90 per cent in equities, investors really need not worry,” adds Bala.