Cash pile at mutual funds is at two year high

The average cash holding of top 20 mutual fund houses by Asset Under Management (AUM) was 5.9% at the end of January 2023. This is the highest cash proportion in the past twenty five months or a little over two years, according to the data compiled by a domestic brokerage, Motilal Oswal Financial Services. In February 2021, the average cash holding was 3.1%.

There are a few reasons for such a high average cash holding of top 20 fund houses. First, the valuation of benchmark indices such as the Nifty 50 continue to remain high. According to analysts’ estimates, the one-year forward price-earnings (P/E) multiple of the Nifty 50 Index is 18. This is 8-10% higher than the 10-year average P/E multiple of the index. Also, the index valuation is at around 25% premium to other emerging markets compared with the historical premium of 15%.

The second factor is the market sentiments are weak as reflected in the range bound movement of benchmark indices. Third, the macro-economic data is less than encouraging. Widening fiscal deficit, dwindling exports, and high inflation are key concerns among investors.

Given these headwinds, managers of leading fund houses have been investing in the markets in a staggered manner. As a result, the average cash holding is the highest in the past two years.