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Opportunity Loss

By sitting on idle cash, funds have been missing on their earning potential for investors

The volatile stock markets have witnessed a sudden rise, with the benchmark indicator, Sensex gaining over 2000 points in just 15 trading sessions between September 1 and 23, a gain of 12 per cent. It makes several investors feel left out from this rally and profit opportunity.

However, it is not just the small investors who have missed the bus; many of the equity funds have been maintaining high levels of cash reserves since April this year. Some fund managers attribute such an approach as being conservative in a volatile market. While others feel it is a fund managers’ job to deploy cash efficiently. We looked at the end-August cash holding of equity funds to ascertain their cash reserves and found many funds sitting with cash in the range of 15-30 per cent of their corpus.

A further look since April this year indicates that many equity funds have been holding high cash reserves. This could be largely to meet redemption pressures that equity mutual funds have been facing over the past 12 months.

Take for instance ICICI Prudential Dynamic; the fund has been consistently maintaining cash levels of over 20 per cent since end-March 2010. Its cash holding reached 28 per cent of the portfolio at August-end or Rs 701 crore. Likewise, Axis Tax Saver Fund on an average has been holding 19 per cent cash since April which is Rs 5 crore. It comes as a surprise, since this is an ELSS and does not face redemption pressures, especially when the fund was launched as recently as December 2009.

Chandresh Nigam, equity head, Axis Mutual Fund, said that Axis Tax Saver Fund has a small corpus and therefore a small cash level may look large in percentage term. “Many a time cash is held for subscription in IPOs (initial public offer) and they get reflected in high cash level,” he said.

S Naren, chief investment officer – equities, ICICI Prudential Mutual Fund, said the Dynamic Fund operates in such a way that in a rising market condition, it increases cash levels and in falling market the cash levels go down substantially. “We don’t take calls on market movement and the high cash holding in the fund is purely by the nature of the fund,” he added. This is in line with the fund’s stated objective in its offer document.

There are other funds such as Religare Equity with 20 per cent cash, Escorts Power and Energy holding 17 per cent and AIG Infrastructure and Reform holding an average of 14 per cent cash since April this year.

Though this could be a normal practice for fund managers in uncertain market conditions, it may result in missed opportunities when the markets take off suddenly. To understand the opportunity cost; take a fund that on an average need to maintain 5-10 per cent cash to meet redemptions. However, if this fund maintains 20 per cent, an excess of 10- 15 per cent it is way beyond conservative limits, resulting in an opportunity loss for investors in the fund specially at times when the markets take off in a rally.

Naren of ICICI Prudential agreed that high cash levels at the time of market rally may mean missing on an opportunity but he added that one cannot have best of both the world. “If our fund mandate is such that it necessitates certain cash level, we have to follow the mandate,” he added.

Top ten funds with high cash allocation
  Mar-10  Apr-10  May-10  Jun-10  Jul-10  Aug-10
Escorts Tax Plan 5.14 3.45 15.78 15.85 15.77 38.56
ICICI Prudential Dynamic 22.88 22.01 16.82 21.36 25.75 27.95
Religare Equity 4.67 35.19 12.30 12.06 28.91 26.24
Tata Equity Management 6.61 4.74 3.36 6.99 6.53 22.19
Escorts Power & Energy 14.65 13.74 21.04 19.87 14.58 21.34
Axis Equity -2.77 10.34 17.58 3.75 21.17 20.95
Canara Robeco F.O.R.C.E Ret 2.73 9.74 13.68 12.80 12.96 18.30
AIG Infrastructure and Economic Reform Reg 12.20 11.35 16.45 17.05 11.29 17.00
Axis Tax Saver 20.03 19.50 20.86 13.41 23.61 16.40
Escorts Growth 3.30 19.72 26.38 20.45 17.41 15.74
All fig in %