Many mutual funds have boosted their cash reserves within equity schemes, mirroring last month’s market downturn. As per data from PrimeMF, the total cash holdings reached ₹1.46 lakh crore by the end of February. However, experts anticipate a potential reversal of this trend in the near future.

Growing Caution Among Fund Managers

Approximately 66% of asset management companies (AMCs) increased cash levels in their equity schemes, with notable names such as Helios MF, Bajaj Finserv MF, PPFAS MF, Quant MF, ICICI Prudential MF, and Axis MF making the list. Analysts attribute this rise to a cautious stance by fund managers, especially in small-cap funds.

The surge in cash holdings comes amid heightened market volatility and concerns over stretched valuations in certain segments. The Nifty 50 index declined by around 5% in February, with broader markets facing steeper corrections, particularly in the small- and mid-cap space. Given the uncertainty, fund managers have opted to hold higher cash positions, allowing them to capitalize on future buying opportunities while mitigating downside risks.

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Major Shifts in Cash Positions

Helios MF, led by Samir Arora, witnessed one of the most significant increases in cash allocation. By the end of February, the fund’s equity AUM held nearly 23% in cash, a sharp jump from just 2% in January 2025. Historically, Helios MF has maintained lower cash reserves.

Addressing speculation regarding a shift in strategy, Arora clarified on social media platform X that the reported figures only reflect the cash position at the end of the month and may not indicate a fundamental change in investment approach. He emphasized that fluctuations could be coincidental unless a consistent pattern emerges.

Bajaj Finserv Mutual Fund also raised its cash reserves from 4.45% to 12.27%, while Motilal Oswal Mutual Fund and PPFAS Mutual Fund saw modest increases to 13.99% (from 12.50%) and 13.16% (from 11.45%), respectively. Samco Mutual Fund maintained the highest cash allocation, increasing slightly from 44.96% to 45.39% between January and February.

Conversely, some funds slightly reduced their cash holdings. Old Bridge Mutual Fund trimmed its cash position from 12.87% to 10.26%, while Quantum Mutual Fund lowered it from 15.95% to 13.31%. Whiteoak Capital Mutual Fund also reduced its cash allocation from 6.53% to 4.99%.

Impact on Market Liquidity and Investment Strategies

The increase in cash holdings across multiple mutual funds raises questions about its impact on overall market liquidity. A higher cash reserve means fewer fresh inflows into equities, which can contribute to short-term market sluggishness. However, it also suggests that fund managers are positioning themselves strategically, ready to deploy capital when valuations turn more attractive.

Experts argue that this cautious approach is especially relevant in the current market cycle, where small-cap stocks have seen significant inflows over the past year. With valuations reaching multi-year highs, some fund managers may prefer to wait for a correction before reinvesting.

On the other hand, the trend could soon reverse. Analysts believe that as markets stabilize, fund managers will gradually reduce cash reserves and reinvest in equities. The readiness to deploy cash, even in a phased manner, indicates optimism about future market opportunities.

Future Outlook

Despite short-term volatility, long-term fundamentals remain intact, and mutual funds will likely return to a more balanced allocation strategy. Karkera believes that while the cautious approach is understandable, funds are signaling a willingness to reinvest. “Several funds have indicated their willingness to start deploying cash—albeit gradually rather than aggressively—which suggests that overall cash holdings are likely to moderate in the coming months,” he explained.

Investors should keep a close watch on fund-level cash allocations, as they provide insights into market sentiment and the outlook fund managers hold for future opportunities. While some investors may see higher cash holdings as a defensive move, others may view them as a sign of prudence, ensuring funds are prepared for potential corrections and more attractive entry points.

Ultimately, whether this trend continues or reverses will depend on market conditions, economic data, and investor sentiment in the coming months.