Indian equity funds see highest cash position in 5 years as valuations remain cautious

Morningstar data showed that the ICICI Prudential Value Discovery Fund, which is valued at about $5.9 billion, saw its cash allocation rise to 14.7% by the end of August from 7% at the start of the year (Image: Shutterstock)

3 minutes of reading Last update: Sep 25, 2024 | 12:47 PM IST

India’s equity funds’ cash allocation relative to their assets rose to a five-year high in late August as fund managers fret about over-rich markets and other macro risks linked to the US election and China’s economic growth.

Active equity funds in India with at least $1 billion in assets held an average of 5.39% of their portfolios in cash at the end of August, a five-year high, according to Morningstar data.

“While the market is performing well, there are potential risks like economic slowdown, changes in interest rates, geopolitical tensions and market revaluation,” said Sonam Srivastava, founder and fund manager, Wright Research.

While the increase in cash levels is partly due to inflows and the launch of new funds, caution is also needed.

“The high cash levels among fund managers may suggest that they are anticipating a potential stock market correction as they seek to limit losses,” said Mahesh Patil, chief investment officer at Aditya Birla Sun Life Asset Management Company.

“This may indicate caution about the rapid rise in markets, especially since there has been no major change in fundamentals to justify the rally,” he said.

After weak profit growth in the first quarter of the current financial year, where more than half of Indian companies missed consensus expectations, fund managers are also worried about valuations.

“There are concerns about valuation as some areas of the markets appear to be overcrowded,” said Abhishek Goenka, founder and CEO of IFA Global.

The forward price-to-earnings (P/E) ratio for the MSCI India large-cap index is 22.8, representing an 18.6% premium to its 10-year average, while the MSCI India mid-cap index is trading at a premium of 67.7% and the small-cap index at a premium of around 40% to their respective 10-year averages.

“Currently, mid-cap valuations seem to be on the high side, hence, there is a possibility of a correction in the mid-cap market,” said Anil Rego, founder and fund manager at Right Horizons.

Morningstar data shows the ICICI Prudential Value Discovery Fund, which is valued at about $5.9 billion, saw its cash allocation rise to 14.7% by the end of August from 7% at the start of the year.

Similarly, SBI Long Term Equity Fund, valued at $3.3 billion, increased its cash holdings to 9.8% in August from 4.46% at the beginning of the year. Quant Small Cap Fund, valued at $3 billion, also saw a significant increase in cash allocation to 15.7% in August from just 2.15% at the beginning of the year.

Some analysts, however, believe that such a high level of cash does not herald a market crash.

“Typically, deep corrections happen when markets are fully invested. If markets are cautious and cautious, we could see 3%-5% corrections that get bought. Cash will start to get deployed, which will support markets,” said Srivastava of Wright Research.

“Nevertheless, a stalemate could occur where the market remains sideways for a significant period of time, testing investors’ patience.”

First published: Sep 25, 2024 | 12:46 PM IST