Does an equity fund manager have a choice not to invest for some time due to market conditions? If yes, where does he park the money?
Yes, most equity fund managers have the flexibility. They have the discretion of not investing 10 per cent, 20 per cent or even up to 35 per cent of their money.
And, in fact, we now have a multi-asset fund where the fund manager can choose to be fully into fixed income or fully into equity depending on the state of the market. But all equity funds have the flexibility. And many a times, they have exercised this option.
They invest it in short term bonds because the equity fund manager's goal of investing in fixed income is not to maximize return, but to protect the downside and to wait for an opportunity. Sometimes, fund managers have made a claim that they are not very enthused by the state of the market, or the underlying companies, or the kind of companies they want to buy are not very cheap and so they are waiting for a market correction to buy further. So, I have come across situations where a third of the fund's money is may be in cash or debt. They invest in fixed income in a very different way as compared to aggressive hybrid funds. They try to optimize the return on the fixed income. And, when I'm talking about aggressive hybrid aggressive equity fund, those funds invest in fixed income to generate return by investing in a kind of bond which will be more than the usual short-term bonds. And they will be investing two-third of the money in equity.