Mutual funds taking cash calls - What should investors do?

Cash calls by MF do help in the present market condition but often prove to be a tricky affair. Read on to find out what should investors do if their MFs are sitting on cash.

If you view your mutual fund portfolio, you might have seen a certain percentage of the assets dedicated to cash or cash equivalents. This is more prominent in equity funds, where on an average the cash holdings are around 5% to 7%. This is usually done to handle the redemptions effectively, without affecting the actual portfolio.

Having said that, if you are holding less in cash, then undue redemptions would lead you to sell securities from the portfolio to cover the redemptions. Therefore, having a decent amount in cash is preferable. However, there are few mutual funds that at times might have more in cash. There are two major reasons for having more in cash. One reason is receiving a large inflow (usually in the case of New Fund Offer), but available opportunities are less attractive. And the other being a pure cash call to help the fund ride the market volatility.

In the present market situation, few mutual funds took cash calls. Therefore, in these volatile times, such funds tend to perform well and most people carrying recency bias end up investing in them. However, when the markets reverse and surge to new highs, the same funds fail to ride the rally.

Therefore, it is more important to analyse mutual funds from a 360-degree view and not only returns. When you select a mutual fund, analyse the consistency of returns generated by the fund, the risk undertaken by the fund, its portfolio, its sector allocation, etc. Although cash calls are not red flags, they are a double-edged sword and if went wrong can seriously dent the returns of the funds.

Axis Mutual Fund is one such Mutual Fund Company which does take cash calls. So, nothing better than analysing the performance of Axis Bluechip Fund and Axis Mid-Cap Fund against its category.