We gather from reports that almost Rs 3-3.5 lakh crore of average cash levels are available for the MF sector from the DIIs to tap into the markets. Is that broadly a correct number to work with?
This is the potential investment which can be done by mutual funds and NPS. For example, today the mutual fund industry is roughly about Rs 14.5 lakh crore and we have about 4.8% cash balance. Now we do keep cash for meeting redemptions but in case the market goes down further, we can certainly reduce this cash balance.
The second segment is balanced advantage fund, it has about Rs 1,75,000 crore AUM. The current equity allocation broadly is about 50% and it can increase to 80% in case the market becomes cheaper. So roughly Rs 75,000 crore can come from a balanced advantage fund in a falling market, though it will not come in a rising market.
Then, if we look at EPFOs investments on a yearly basis, over the next 12 months, they can easily bring in about Rs 40,000 crore at the current limit of 15% of their incremental AUM in equity. If that limit is increased to 25%, that number can go to 60,000 crore.
Finally if we look at SIP flows, we have been hitting a run rate of about Rs 12,000 crore a month assuming that there is no cancellation. We could be looking at roughly about Rs 1,50,000 crore coming from the SIP flows. So in a falling market, Indian mutual funds and NPAs put together can invest roughly around Rs 3,20,000 crore. But mind you, it is in a falling market not in a rising market.
Could you tell us which category funds approximately have how much cash on the books?
There are roughly Rs 14.5 lakh crore AUM across equity funds, about 4.8% or Rs 70,000 crore is the cash in this mutual fund. We do have to keep some cash for meeting redemptions but when markets are screaming buy like March, April, May ‘20, then certainly we will run down our cash balance to maybe half a percent or one percent.
What is your sense regarding the overall market set up that we are seeing at the moment? Can these elevated cash levels help cushion the market fall?
Most of the mutual funds do not take cash calls except in balanced advantage fund or asset allocation fund from a mandate point of view. We generally have been running between 1% and 7-8% kind of cash. Currently, we are in the middle – at about 4.8% – for the industry as a whole.
Certainly in a falling market, having some cash on the balance sheet gives one the flexibility to buy into the correction and it also has the ability to cushion the fall. But the real opportunity for us is the balanced advantage fund and asset allocator fund. These funds allocate between debt and equity based on the valuation of the market. In January 2019, our balanced advantage fund had 39% allocation to equity. In March 2020, as the markets corrected, it went up to about 75%. Today it is at 50%. So depending upon the valuation and the movement of the market, balanced advantage fund can cushion the market. In a rising, expensive market, they will be sellers, in a falling market they will be buyers.
We have seen what has been happening with the markets and the volatility is making retail investors jittery. Are mutual funds also cautious or are they using the dip to add?
Between October 2021 till today, by and large we have been buyers. We have been buying into the market on the correction in stocks where we believe valuations are fair. We are not oblivious to the fact that there is lot of uncertainty ahead and there could be volatility. We have advised our customers that this is the time to be equal weight to the equity allocation, be marginally overweight largecap, be marginally underweight small and midcap but invest in every correction with a longer term view.
There is uncertainty ahead. There is volatility ahead, but every correction is a great opportunity to buy in India’s growth story.
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