Equity Cash Holdings Plunge as Market Volatility Deepens; PPFAS Holds Up Against Declining Liquidity Buffer

Equity Cash Holdings Plunge as Market Volatility Deepens; PPFAS Holds Up Against Declining Liquidity Buffer​

The aggregate cash holdings of top equity mutual fund houses have seen a notable contraction in May, dropping to 5.2 percent. This reduction comes despite a period of market volatility, indicating that fund managers are selectively deploying capital amid mixed performance across the broader equities landscape.

Data from Motilal Oswal Financial Services' Fund Folio provides granular insights into this shift, highlighting that while some funds aggressively reduced their liquidity buffers, others maintained stable positions.

Market Performance and Institutional Flows Amid Volatility​

May presented a challenging period for the overall equity market. The Nifty experienced a 1.9 percent decline during the month. In contrast, specialized segments showed resilience, with the Nifty Midcap 100 rising by 3.2 percent and the Nifty Smallcap 100 gaining 0.7 percent.

Institutional investment flows registered a mixed picture. Domestic institutional investors (DIIs) provided support, investing $8.7 billion. However, foreign institutional investors (FIIs) remained net sellers for the third consecutive month, withdrawing $4.9 billion.

Fund House Strategies and Cash Allocation Shifts​

While the aggregate trend points toward reduced caution, specific fund houses displayed varied strategies regarding cash balances. Parag Parikh Financial Advisory Services (PPFAS) Mutual Fund continued to maintain the highest cache allocation among the top 21 fund houses, reporting 17.7 percent in May. This represents a reduction from 18.7 percent in April and 21.8 percent in March.

Several major players reduced their liquidity buffers significantly. SBI Mutual Fund recorded the sharpest decline between April and May, bringing its cash holdings down to 6.2 percent from 7.4 percent. Similarly, Axis Mutual Fund lowered its cash allocation to 6.9 percent, a decrease from 7.8 percent in April.

Varied Responses: Declines vs. Maintenance​

The trend of decreasing cash levels was observed across various funds. Nippon India Mutual Fund reduced holdings to 1.6 percent in May, down from 2.2 percent in April. Tata Mutual Fund brought its level down to 4.7 percent in May, following a reduction from 5.7 percent in April.

Amid this downturn, other fund houses demonstrated resilience or positive movement. DSP Mutual Fund maintained steady cash holdings at 7.6 percent in May. Motilal Oswal Mutual Fund increased its cash levels marginally to 4.5 percent, up from 3.6 percent in April. HSBC Mutual Fund also saw a marginal increase to 2 percent, though this remains below the 3.5 percent level recorded in March.

Inflow Moderation and AUM Stability​

The reduction in fund house cash balances coincided with moderated net inflows into equity schemes. Net inflows fell dramatically to a 12-month low of Rs 23,800 crore in May, down from Rs 43,100 crore in April. Gross sales declined 24.4 percent month-on-month to Rs 66,400 crore, compared to redemptions at Rs 42,500 crore.

Despite the reduction in cash and moderated inflows, equity assets under management (AUM) showed stability, rising by 1 percent month-on-month to reach Rs 39.5 lakh crore in May. Separate data tracking equity schemes alone showed aggregate cash levels declining to 2.3 percent of equity assets, down from 2.57 percent in April.

The collective decline in cash balances strongly suggests that fund managers are strategically capitalizing on the current market weakness by increasing their equity exposure. Nevertheless, the sustained elevated cash holdings at select top funds underscore that a degree of caution regarding valuations and prevailing market conditions persists within the sector.