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Business News/ Market / Stock-market-news/  Mutual funds’ cash level at five-month high as fund managers turn cautious
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Mutual funds’ cash level at five-month high as fund managers turn cautious

Cash levels as a percentage of mutual funds' domestic equity portfolios rose to 5.6% at the end of July

Lower interest rates have prompted retail investors to look away from traditional investment options. Photo: BloombergPremium
Lower interest rates have prompted retail investors to look away from traditional investment options. Photo: Bloomberg

Mumbai: Cash levels of mutual funds’ domestic equity portfolios as a percentage of assets under management (AUMs) are at a five-month high at the end of July, as fund managers have turned cautious because of high valuations.

Data from mutual fund research firm Morningstar showed that cash levels as a percentage of mutual funds’ domestic equity portfolios rose to 5.6%, the highest since March. 

It is important to note here that while cash levels had come down below 6% in March, they had shot up post-demonetisation and risen to 6.5% in January.

In absolute terms, the cash levels are at a record high of Rs35,055 crore at the end of July, given the surge in AUMs and strong domestic flows in recent times.  

“Everybody is apprehensive, but nobody wants to pull out funds. There is nervousness, and there is no doubt of it. Managers would just want to wait longer before they deploy fresh funds," said Dhirendra Kumar, chief executive of Value Research, a mutual fund analytics firm. 

To be sure, the cash levels in the study also include fairly liquid investments such as collateralized borrowing and lending obligations (CBLOs), and any investment in the respective asset management firm’s liquid schemes. 

The benchmark BSE Sensex traded at one-year forward P/E (price to earnings ratio) of 20.4 times on 31 July, data from Bloomberg showed. In comparison, the five-year average P/E and 10-year average P/E for the benchmark stood at 16.46 times and 16.35 times, respectively. Currently, the Sensex trades at 20.53 times one-year forward earnings.

The Sensex touched a record high of 32,686.48 points on 2 August, and is down 2.8% since then to 31,770.89 on Wednesday. 

“These (cash) levels have to be seen in the light of large flows," said Navneet Munot, chief investment officer, SBI Funds Management Pvt. Ltd. 

“It is because of high inflows, and valuations going high, particularly in the mid cap and small cap space. There are pockets of overvaluation, and one needs to focus on bottom-up stock-picking in this market," added Munot. 

Net inflows into equity mutual funds were at a record Rs12,727 crore in July. Mutual funds have continued to receive net inflows in all months since May 2014, barring one. Lower interest rates have also prompted retail investors to look away from traditional investment options such as fixed deposits to mutual funds for better returns. 

Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India Pvt. Ltd, shared Munot’s view.

“It’s a mix of a couple of things. Since November, the flows have been immense, and markets have been running up," said Belapurkar. “Valuations have become expensive. Managers have become cautious in allocating their funds. Earnings growth has been sluggish, which shrinks their investible universe."

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Published: 16 Aug 2017, 11:25 PM IST
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