Tactical Cash Calls Have Not Added Much To Flexi Cap Fund Returns: Edelweiss Mutual Fund

Lately, data has shown how some mutual funds held a significant percentage of their portfolio in cash. The idea behind it was to invest as and when the opportunity would arise. But a recent study by Edelweiss Mutual Fund shows that while holding cash may feel like a safe, tactical move when markets look uncertain, over time this strategy may actually hurt returns in flexi cap funds rather than help them.

According to a study by Edelweiss Mutual Fund, most flexi cap funds in India typically run with relatively low cash levels. An analysis of average, minimum and maximum cash holdings over the last three years shows that for a large part of the category, average cash positions remain below 4 per cent. In fact, several large funds operate with even tighter cash buffers, often staying close to being fully invested.

But there are exceptions, of course. A few funds have, at times, held significantly higher cash. Some were touching double digits and, in extreme cases, even crossing 20 per cent. But these are outliers rather than the norm.

So, does holding higher cash actually improves outcomes.  Well, Edelweiss’ analysis of three flexi cap funds that had among the highest average cash holdings over the last five years suggests otherwise.

Over a 60-month period, the broad market index, Nifty 500 TRI, saw 16 months where returns were down by more than 1 per cent. Despite these drawdowns, the funds studied held cash above 5 per cent for a large number of months– 50 months in one case, 40 in another, and 29 in the third. Their average cash holdings over five years ranged from about 6.5 per cent to nearly 13 per cent.

What did investors get in return for this caution? A drag on performance, shows the study results. Edelweiss estimates that during months when markets were rising or recovering, maintaining cash above 5 per cent led to a return drag of about 5 per cent to over 9 per cent, even after accounting for losses potentially avoided during market declines.

In simple terms, while cash may soften the fall during short market corrections, it also reduces participation when markets rebound and those recovery phases tend to matter more for long-term wealth creation.

The takeaway is not that cash is always bad, but that frequent or prolonged tactical cash calls can be costly. Flexi cap funds, as defined by the Securities Exchange Board of India (Sebi), can invest across market caps– large cap, mid cap or small cap companies as per the choice of the fund manager. Using cash as a timing tool, as per the study, has not consistently added value.