Despite the uncertainties created by rising bond yields and oil prices, fund managers have been proactively deploying fresh flows into the equity market.
The cash available with equity fund managers, which has remained lower at around 5 per cent in the past few months, hit a 16-month low of 4.8 per cent in September, shows a Motilal Oswal Financial Services report.
Cash holdings in equity schemes had topped 6 per cent in February amid subdued equity market sentiment.
The scenario changed at the end of March as the market started gaining momentum after remaining range-bound for almost a year and a half.
In the first six months of FY24, the Nifty gained over 13 per cent, while the Nifty Midcap 100 and Nifty Smallcap 100 rose by 35 per cent and 42 per cent, respectively.
Fund managers say while the mutual fund mandate is to stay fully invested, they have some leeway to keep the powder dry during times of uncertainty or excessive valuations.
“We are long-term-oriented and, hence, short-term fluctuations in the market do not have much bearing on the way we manage funds.
"From a longer-term horizon, opportunities are always there,” said Chandraprakash Padiyar, senior fund manager at Tata Mutual Fund.
He said one reason for the decline in cash levels at Tata Mutual Fund could be the restrictions on fresh investments in its smallcap funds.
“At one point of time, cash had gone up in our smallcap fund due to strong inflows.
"After the restrictions, we have been able to deploy a portion of this money,” he said.
At the end of September, 11 of the top 20 fund houses had less than 4 per cent cash in their equity schemes.
For some of the larger fund houses, like SBI Mutual Fund, ICICI Prudential Mutual Fund, and HDFC Mutual Fund, it was over 6 per cent.
During the first six months of FY24, mutual funds deployed a net of Rs 45,700 crore into the equity market.
The sector-wise deployment data shared by ICICI Securities for the first four months (April to July) shows the financial services sector (Rs 23,000 crore) received the bulk of the MF investments, followed by information technology (Rs 4,900 crore) and materials (Rs 2,000 crore).
Buying in the financial services sector was higher partially due to mutual funds shifting their allocation from HDFC Bank to HDFC ahead of the merger for arbitrage benefits.
Fund managers see opportunities in pharmaceutical, health care, automobiles, and capital goods.
“One area we like is the pharmaceutical and health care sectors.
"The valuations are reasonable and the companies are showing incremental improvements in their balance sheets.
"In addition, the long-term structural growth prospects are in place.
"Two other areas where the equation is reasonable are automobile and banking and finance,” said Vetri Subramaniam, chief investment officer at UTI Asset Management Company.
“We are positive on domestic cyclicals, which include auto, capital goods, cement, and financials other than banks.
"We are underweight on banks even though the demand environment is strong, but the competitive intensity for deposits is very high,” said Anish Tawakley, deputy chief investment officer, equity, and head of research at ICICI Prudential Mutual Fund.