Your mutual fund might be holding too much cash
1 min read 22 Sep 2020, 04:44 PM ISTEquity funds usually have low cash levels as these schemes are vehicles meant for long-term investments
PremiumEvery mutual fund scheme comes with a mandate to invest in certain types of securities. And at all times, as well. But every mutual fund scheme is allowed a tiny part of its portfolio in cash. This is allowed in order to meet redemptions or any "buy" opportunities that the fund may come across on any day.
Usually, equity funds hold cash between 1% and 5% of a fund’s corpus, though some funds can hold as high as 7-10% of their corpus in cash. Some funds prefer to hold larger portions of their portfolios in cash because their mandate allows them to hold high cash levels if—as per their analysis—good stocks are not available at desirable valuations. Few others like dynamic equity funds also hold higher cash if they feel equity markets are overheated.
Equity funds usually have low cash levels as these schemes are vehicles meant for long-term investments. Debt funds have a larger allocation to cash and cash equivalent instruments as investors usually invest for the shorter term here and therefore there is a bigger chance of redemption in debt funds. Whether or not a fund ought to hold cash is a subjective call.
Here’s a list of funds with the highest cash levels (data from valueresearchonline.com). But keep in mind that it's not wise to choose a fund based on its cash holding. Instead you should evaluate parameters such as long-term returns, portfolio risk and the fund manager’s strategy.
