The decision on how much cash to hold is a tough one. And with the market factoring in all the bad news and sentiment at an all time low, fund managers certainly do not want to be caught on the wrong foot if the market suddenly does an about-turn. That is exactly what happened in the first quarter of 2009 when some managers were invested only up to 80 per cent and got hit in the first leg of the rally.
However, at the end of March 2012, all equity schemes, except sector funds, tax saving and balanced funds, held just 3.24 per cent of net assets in cash. This is the lowest level reached in cash since March 2007, clearly showing that fund managers are deploying cash. Holding assets up to 5 per cent in cash is needed for liquidity issues.
As the graph reveals, fund managers were at the same cash levels in 2007. But as the bull run ended in January 2008 and the news just kept getting worse from around the globe, cash levels of almost all schemes went up from 6 per cent to 13 per cent and remained there till the first half of 2009.
Worth noting is that the situation is different if we look at it from individual fund houses. Smaller fund houses like Edelweiss, Daiwa, Peerless and Taurus do tend towards higher cash exposure (more than 10%) at different points of time as their assets under management are low. Quantum Mutual Fund is an exception as its cash holdings are almost nil. Larger fund houses, on an average, hold less than 6 per cent assets in cash barring ICICI Prudential Mutual Fund, due to some of its schemes like ICICI Prudential Dynamic.
In a falling market, a fund with a high cash allocation will fall lower but the reverse holds when the market rises.