Mutual Funds Boost Equity Scheme Cash Reserves to ₹1.46 Lakh Crore During Market Downturn

Fund Managers Take a Cautious Approach as Market Volatility Persists

Mumbai: Indian mutual funds increased their cash holdings in equity schemes to ₹1.46 lakh crore by the end of February 2025, reflecting the impact of the sharp market correction. Data from PrimeMF suggests that nearly 66% of asset management companies (AMCs) increased cash reserves, signaling a defensive stance amid ongoing market volatility.

Prominent fund houses, including Helios Mutual Fund, Bajaj Finserv Mutual Fund, PPFAS Mutual Fund, Quant Mutual Fund, ICICI Prudential Mutual Fund, and Axis Mutual Fund, were among those that significantly raised cash positions in February.

Market experts believe this trend is a result of a cautious investment strategy, particularly among small-cap and mid-cap focused funds, which have been more vulnerable to sharp corrections.

Why Fund Houses Increased Cash Holdings

1) Market Volatility and Cautious Positioning

The surge in cash holdings coincides with increased market uncertainty in February. The Nifty 50 index ended the month nearly 5% lower, prompting many fund managers to hold back investments in equities and instead accumulate liquidity for better entry opportunities.

According to Nirav Karkera, Head of Research at Fisdom, mutual funds have been gradually increasing their cash position for several months, and the February spike is in line with that strategy.

“This is happening amid excessive market volatility, making it a natural response from fund houses that are keen to avoid short-term risks,” Karkera noted.

2) Small-Cap Funds Take a Defensive Stance

One of the primary reasons for the rising cash piles is the heightened risk in small-cap stocks. The mutual fund industry has witnessed massive inflows into small-cap and mid-cap funds, but concerns about overvaluation and profit booking led fund managers to reduce active exposure and increase cash reserves instead.

Some fund houses have opted for a more conservative approach, especially for funds that mandate exclusive small-cap investments, indicating caution amid stretched valuations.

Funds That Increased Cash Reserves in February

Several major fund houses significantly raised their cash allocations in February.

• Helios Mutual Fund, led by Samir Arora, saw one of the largest increases in cash holdings. The fund’s equity AUM cash position surged from 2% in January to 23% in February, a move that surprised market watchers.
• Bajaj Finserv Mutual Fund increased its cash position from 4.45% to 12.27%.
• Motilal Oswal Mutual Fund and PPFAS Mutual Fund maintained relatively high cash reserves, increasing their positions from 12.50% to 13.99% and 11.45% to 13.16%, respectively.
• Samco Mutual Fund had the highest cash allocation among mutual funds, with an increase from 44.96% to 45.39% between January and February.

Fund Managers Defend Higher Cash Holdings

The decision to hold higher cash reserves raised speculation about a potential shift in investment strategy, especially for Helios Mutual Fund, which has traditionally maintained a low cash allocation.

Responding to market speculation, Samir Arora clarified on social media platform X that the increase in cash holdings does not indicate a permanent change in investment philosophy.

“This is just the position at the end of the month, not five days before or five days later. These things can happen by chance unless you see a consistent trend. If we need to sit on cash, we will, but right now, there isn’t enough information to conclude whether this is a deliberate long-term shift,” Arora said.

Funds That Trimmed Cash Holdings

While most funds increased their cash positions, a few fund houses slightly reduced their cash exposure in February:

• Old Bridge Mutual Fund reduced its cash allocation from 12.87% to 10.26%.
• Quantum Mutual Fund trimmed its cash position from 15.95% to 13.31%.
• Whiteoak Capital Mutual Fund lowered its cash reserves from 6.53% to 4.99%.

On an industry-wide basis, the average cash holding across mutual funds increased from 3.34% in January to 3.69% in February.

Expert Insights on Future Strategy

Despite the surge in cash positions, some analysts believe this trend could reverse in the coming months as fund houses start deploying excess cash into equities.

According to Karkera, fund managers have been indicating a gradual shift towards reinvesting cash holdings, albeit cautiously.

“Many funds have signaled their readiness to deploy cash, not in an aggressive manner, but gradually over time. Portfolio data also suggests that fund managers are positioning themselves to re-enter the market selectively,” he said.