Plans often keep 3-5% cash for redemption requests. However, when funds go far beyond this area, it is usually for strategic reasons. ahead liquidity constraintsSome equity funds are known to take cash calls as a strategy. purpose is to protect Return To keep ammo ready for anticipation of market downturn and entry at lower prices. Rohit Shah, CEO, GYR Financial Planners said, “This is an attempt to make the fund risk-free amidst market uncertainty and provide a cushion against downsides.”
Currently, Axis MF’s schemes are among the largest cash depositors, ICICI Prudential MF and State Bank Of India MF. Fund managers do not share the broader market enthusiasm for equities. Chintan Hariya, Head of Product & Strategy, ICICI Prudential AMC, explains, “The valuation of the Indian equity market is currently at a historical premium to other emerging markets. With falling global trade and rising fiscal deficit, Indian markets may see some consolidation and provide opportunities. In such an environment, having some cash cushion would lead to opportunistic purchases. Fund managers say it is important to keep this battle-chest on standby to act quickly during sharp market volatility.
Rajeev Thakkar, CIO, PPFAS Mutual Fund, sometimes uses the cash in his fund as a shield during market excesses. This allows it to deploy quickly when markets fail, as it did during the March 2020 market crash. Also, others stay away from cash calls as a policy. They prefer to remain fully invested at all times, except for modest cash holdings for liquidity purposes.
Messing with cash does not suit the needs investors Demanding full participation in the market, they insist. Thakkar has a different point of view. “At times, the flow is a bit uneven or the assessment is one-sided. Instead of rushing and buying anything at any cost, we prefer to take the time to deploy,” he says.
Another counter to the strategic use of cash is that asset allocation is often handled at the level of the investor itself. Some even engage with financial advisors to correct the allocation. If the fund manager also starts taking cash calls, it only complicates matters for the investor and may create conflict with their current asset allocation, said Arun Kumar, Head of Research, FundsIndia. He stressed that the fund manager should not keep an eye on the market unless the fund asset allocation is a fund. But Amol Joshi, founder, PlanRupee Investment Services, says that higher cash positions in a fund have an incremental effect, at least to a point, on the asset allocation of investors.
In addition, critics point out that cash calls often go wrong. Trying to time the market has proved to be a futile exercise. One cannot determine in which direction the market will go at any given time. Under-investment during a bull market can lead to severe underperformance. “Taking a cash call is like betting against the market, which is not the mandate of the fund,” Shah insisted. Furthermore, funds are not particularly skilled at playing this game. “The track record of asset management companies in strategic use of cash is not great. No fund does it consistently well,” says Kumar. Even if a fund gets it right occasionally, it regularly misses out on profits, and these mistakes get compounded over time. After being caught snuggling, they later struggle to catch up with Index and mates.
A prime example of a cash call is Quantum Long Term Equity Value, which is the flagship scheme of Quantum AMC. For the longest time, this once high-flying value-focused fund deliberately kept away from the market. At one point in 2015, debt and cash holdings in the fund exceeded 30%. The fund manager considered the valuation too expensive and preferred not to invest fully for years. By the time the price topic picked up honestly, the fund was going heavy on cash to be able to ride the upside. It is now severely lagging behind its peers, who were in a better position to capture the rotation toward value stocks.
Kumar says this is a thin line that fund managers walk. “It could be a trap. If you are out of the market and it goes up, you are waiting for it to come down again and be positioned so that you can reclaim the ground you lost. But Hariya insists Says that when used wisely, cash calls can add value. “It gives the fund manager additional leverage to take full advantage of price corrections. Yes, there is another side to it, like missing out on a runaway market.” to be, but irrationality doesn’t last very long.”