Cash Lures Indian Funds as Bargains Vanish Amid Stocks Rally

(Bloomberg) -- India's world-beating stock-market rally is prompting money managers to play it safer.

Cash levels at equity mutual funds climbed to an average of 6 percent of assets for the March quarter, according to data from Morningstar Investment Adviser India Pvt. That's the biggest proportion since 2012.

Equity funds are reacting to a side-effect of the S&P BSE Sensex index's 10 percent gain this year: concerns that stocks are overpriced. Valuations at the end of March were at the highest level since 2010 amid bets that a state election victory will embolden Prime Minister Narendra Modi to push ahead with his reform agenda.

“Fund managers are being cautious as valuations are looking stretched,” Taher Badshah, chief investment officer of equities at Invesco Asset Management (India) Pvt. in Mumbai, said by phone. “The cash buffer will give them the ammunition to take advantage of any correction in the market.”

Click here to read what GQG's Rajiv Jain says about the rally

Rich valuations was one of challenges faced by BlackRock Inc.'s Indian unit, which in in February shut its DSP BlackRock Micro Cap Fund to new investors. The S&P BSE MidCap Index has surged 20 percent this year, while the Sensex is the best-performing equity benchmark so far this year among the world's 10 biggest stock markets.

“Funds are taking a more selective approach, weighed by high valuations especially in mid and small-cap stocks,” Kaustubh Belapurkar, director of fund research at Morningstar, said by phone. “Managers are finding it tough to allocate money amid a gush of inflows.”

Retail Growth

Individual investors have been a force behind mutual funds' growing heft since Modi took office in May 2014.

• Retail accounts in equity-linked plans grew by 5.8 million to 44 million in the fiscal year ended March, data from the Association of Mutual Funds in India show
• Investors poured 704 billion rupees into stock funds in that period, a third straight year of inflows, the data show
• New money and a buoyant market bumped up assets managed by equity funds to an all-time high of 5.47 trillion rupees at the end of March, up from about 4 trillion rupees
• Fourteen new equity plans were sold in the March quarter, compared with nine offerings in the year-ago period

Although the cash hoard as a proportion of assets has grown, it is less than the average 13 percent funds held during the global financial crisis in 2008, according to Morningstar. The reading peaked at 20 percent in February 2009, the data show.

The Sensex has set fresh records this year, the last one on April 5. The two percent decline since then may not last long, according to Invesco Asset's Badshah said. The gauge rose 0.3 percent at the close in Mumbai. The mid-cap index rose 0.7 percent to a record.

“High cash levels also means that market declines will be short lived,” said Badshah, whose firm has 3 percent of its $619 million assets in cash.

--With assistance from Manish Modi

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Ravil Shirodkar, Vivek Shankar