Understanding negative cash positions and the importance of exercising caution
25-May-2023 •Ravi Banagere
While it's not uncommon for a fund to experience occasional negative cash and cash equivalents, it's essential to closely monitor if there are consistent offenders.
And so, to directly answer our reader Hrishikesh Dingankar's query, debt funds that have negative cash positions consistently can be risky. This issue can impact their overall performance.
For those unaware, a negative cash position occurs when a fund owes more than it owns.
This can occur due to two reasons:
Why it is risky
When a fund receives high withdrawal requests and has insufficient new investments, it may need to borrow cash or sell securities to generate some money.
However, selling securities in a stressed market can lead to lower prices, causing a decrease in the fund's value. As a result, investors may see a decline in the net asset value (NAV) of their units.
Point to remember
While repeated offenders should be on your red list, you can consider the magnitude of the negative cash position relative to the fund's total assets under management (AUM).
That said, negative cash positions of any type should at least trigger your spider-sense.
How to check a debt fund's cash positions?
For instance, in the screenshot below, -0.17 per cent denotes the amount payable, reflecting a negative cash position.