Stocks pricey, mid- & small-cap funds prefer to hold more cash

Cash holding of mid-cap and small-cap funds has increased significantly following stretched valuations of these companies and the regulatory rejig of the fund categorisation based on market capitalisation, which reduced the basket of securities. On the other hand, cash with large-cap funds is on a decline reflecting that fund managers prefer to hold prominent companies with proven business fundamentals.

Cash level at large-cap funds (excluding ETFs) dropped to 3.6 per cent of the assets under management (AUM) in June compared with 5.1 per cent in February and the 12-month average of 4.7 per cent, according to the data from Value Research. In contrast, nearly half of the mid-cap funds had cash levels above 5 per cent in June.

The mid-cap funds of prominent asset management companies (AMCs) such as ICICI MF and Axis MF had cash holding of 16.4 per cent and 13.9 per cent in June. Cash with small-cap funds was 9.9 per cent while their average cash holding in the past 12 months was 11.9 per cent.

Fund managers have turned conservative after the recently concluded general elections wherein the Bharatiya Janata Party (BJP) under the leadership of Narendra Modi was elected for a second term. This is unlike five years ago when BJP’s thumping victory in the election had resulted in a “hope rally” propelling the mid-cap and small-cap stocks to record highs.


Mrinal Singh, deputy CIO at ICICI Prudential MF, said that there was significant valuation comfort in 2014. In the current scenario, the hope rally played out before the election thereby reducing the valuation comfort. He, however, maintains that the higher cash level during June is adhoc in nature. He recommends investing with at least five-year horizon through systematic investment plans (SIPs).

The Nifty Midcap 100 index has underperformed the Nifty 50 index by 18 per cent in the past three years. Despite this, the midcap index trades at 17.4 per cent premium to the Nifty 50 and 27 per cent higher than the 10-year average, according to Bloomberg. Apart from high valuation, the risk emerging form the balance sheet is greater for midcaps thereby further limiting the investment comfort.

Mid-cap funds received inflows of Rs 2,607 crore in the past three months, which accounted for 14 per cent of the total domestic inflows in the equities, according to AMFI.


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