Diversified equity schemes


The total Assets Under Management (AUM) of domestic mutual funds was Rs. 3,07,107crore in the last monthly report. Roughly 30% of these belong to diversified equity schemes. Since, currently on an average, around 9% of the total assets held by diversified equity schemes is in the form of cash and/or cash equivalents (liquid short term instruments such as call money, reverse repo, etc) this figure comes to a whopping Rs. 8,000crore.

A Study on the portfolio allocation of diversified equity funds indicates that the quantum of cash and / or cash equivalents assets of these funds have risen from Rs 3,500 crore in December 2005 to Rs 8,000 crore in August 2006.

Funds mobilized by New Fund Offers have yet not been invested due to lack of suitable investment opportunities. New funds like Reliance Equity Fund, Standard Chartered Enterprise Equity Fund. Templeton India equity Income Fund, etc have typically kept a large part of their corpus in cash equivalents. Reliance Equity (the fund that mopped up over Rs. 5,700 crore in its NFO) has almost a third of its holding in cash equivalents (amounting to Rs 1,676 crore). As on the same date, Standard chartered Enterprise equity Fund has more than 50% of its funds lying in cash equivalents (amounting to Rs 758 crore) and Templeton India Equity Income Fund has Rs 421crore lying in cash equivalents.

Holding onto cash and/or cash equivalents as an investment strategy:

With the markets becoming increasingly unpredictable and volatile, some fund houses have started adopting a cautious approach while investing. They tend to hold onto a significant amount of cash and/or cash equivalents as cushion in case their investment decisions go wrong.

Redemption Pressures:

Anticipation of redemption pressures in the event of the markets once again rallying has been cited as another important reason for the high cash levels. Past trends show that during a rising market, many institutional and high net worth investors redeem their investments as their earnings target is met. In expectation of these demands, fund houses usually maintain some percentage of their corpus in cash and/or cash equivalents.

Dividend payouts:

When mutual funds maintain a large proportion of their total assets in cash and/or cash equivalents, it could suggest that they are planning dividend payouts. This is good news for investors as dividends are tax free in the hands of the investors. Equity oriented mutual fund schemes are not required to pay dividend distribution tax which is pegged at 14.025% in the case of dividends distributed by debt-oriented mutual fund schemes to individuals.

Large component of cash and/or cash equivalents not a bad sign:

The investor sometimes may wonder if it is advisable to invest in diversified equity funds when they themselves are maintaining such a high level of cash and/or cash equivalents. In general, when fund managers resort to keeping large proportions of cash and/or cash equivalents it does not mean that the fund will under perform in the long run. Such funds can seize investment opportunities as and when they come and do better than their peers, who may not have funds to invest at that point of time.

Fund houses should not retain a high level of cash and/or cash equivalents for a longer time period as it can nullify the investment objective of retail diversified equity fund investors who invest in an equity oriented fund to get market linked returns.