Diversified funds hold on to cash

Diversified equity schemes seem to prefer cash over equity. According
to ICRA online data, some schemes have close to 60% of their total
assets under management (AUM) in cash.
Industry experts say that most funds are sitting on cash anywhere
between 10-15% of AUM, as the market continues to move in a narrow
range. ``Our analysis shows that the cash portion of the portfolio has
been growing steadily in the last few months,'' says a mutual fund
analyst.
Why are funds sitting on cash, when they can buy shares cheaply and
maximise returns for their investors? ``A fund could be sitting on
high cash levels for a variety of reasons, including waiting for the
correct entry point to negative or range-bound market view. In case of
NFOs, the fund may also be in the deployment mode,'' explains Sameer
Kamdar, ceo, Asset Management, ASK Investment Holdings. ``People don't
think the market will move up sharply soon. In such a situation, they
prefer to stay on cash,'' says Waquar Naquvi, ceo, Taurus Mutual Fund.
``Most fund houses are sitting on cash up to 15-30%.''
Another reason why some of the schemes may prefer to sit on cash is
because of the nature of their investment. ``When you are running a
small or a mid-cap scheme or a scheme looking for new opportunities,
you will have to keep some cash aside. Especially in a market like
this, the cash could come in very handy,'' says an MF manager, who
doesn't want to be named. ``Also, some funds try to show better
performance by sitting on cash, as most funds are in the negative
territory.''
However, Naqvi points out that extremely high cash element in the
portfolio won't work over a long period of time. ``It should be a
short term strategy. If you keep extremely high percentage of cash,
then you won't qualify as an equity MF for the tax purpose. And the
investors would suffer,'' he says. An equity fund should have to
invest at least 65% of its portfolio in stocks to qualify for the long
term tax-free capital gains status.
So, what exactly is the ideal percentage of cash in a portfolio? Some
fund managers believe 5% cash is ideal, but they point out that ideal
percentage works in an ideal market. ``There is no ideal percentage of
cash one should have in the portfolio. It all depends on the style and
the view of the fund manager,'' says Kamdar. ``MNCs may have such
figures, but Indian companies don't stick such rules,'' points out
Naqvi.

Source: http://timesofindia.indiatimes.com/Business/India-Business/Diversified-funds-hold-on-to-cash/articleshow/4198045.cms