Monday, March 23, 2009

CASH COMPENENT IN FUNDS... IS A WORRY

Going by the Fact Sheets of Most Mutual Funds these days, one thing is crystal clear. They are sitting on Huge Cash.
While Funds typically do have cash in hand at around 5%, it is susprising that across board, maximum Funds are not holding cash levels ranging anywhere between 10% to even 60% in some cases!!!. And, Some Funds like Reliance Natural Resources Fund has been sitting on Cash of upto 30% for more than a year now!!!

Why are funds sitting on cash, when they can buy shares cheaply and maximise returns for their investors?

A fund could be sitting on high cash levels for a variety of reasons, including waiting for the correct entry point to negative or range-bound market view. In case of NFOs, the fund may also be in the deployment mode. Fund Managers do not want to get caught with a Falling Knife. They seem to be waiting for the market to find some kind of support and then plunge in gradually. Moreover, sitting in cash in a falling market protects the NAV and ultimately, that's what the Fund Manager is paid for.

However, a note of caution is required in that, the extreme high cash element for a long period of time could work against the Fund's performance as the Fund Manager may miss out on any rally.
Also, if the fund does not invest at least 65% of its portfolio in stocks, (insteads keeps it in cash and debt), then the fund will not qualify for the long
term tax-free capital gains status.

However, upto 5% cash in hand is considered ideal by most Fund Managers and is in fact recommended. And in Bear or a Range-bound Market, 15-20% cash compotent is permissible.

Best of luck,
Srikanth Shankar Matrubai


Also visit http://equityadvise.blogspot.com for an indepth Equity Analysis

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