Cash Isn’t Cowardice: The Silent Strategy Behind Top Mutual Fund Portfolios

As equity markets scale recent highs and benchmark P/E ratios remain elevated, some of India’s most prominent mutual fund schemes are building unusually large cash buffers. Abhishek Wani dives into the ₹1.1 lakh crore cash mountain across 60 top equity funds - exploring why they’re holding cash, which funds lead the trend, what it signals for investors, and how to interpret cash as strategy, not idleness [EasyDNNnews:PaidContentStart]

Cash Holdings: The Silent Signal in a Frothy Market
In a market where stock indices hover near recent highs and investor sentiment borders on euphoria, a quiet countertrend is gaining ground. While the Nifty 50 trades at a steep 23x price-to-earnings on trailing twelve month basis (TTM P/E) ratio well above its five-year median of 22.6x, several leading equity mutual fund schemes are choosing restraint over risk. Instead of aggressively deploying capital, many are sitting on elevated cash, signalling discipline amid stretched valuations.

This isn’t hesitation, it’s strategy. Elevated cash positions, particularly in value-oriented, Mid-Cap, and flexi-cap funds, reflect a calculated response to the current risk-reward tradeoff. Fund managers are not chasing the rally, they are waiting for conviction to align with opportunity.

To understand this shift, we analysed the top 10 equity mutual fund schemes by assets under management (AUM) across six key categories: Large-Cap, Mid-cap, Small-Cap, Multi-cap, Flexi-cap, and Value. Together, these 60 funds manage over ₹15.48 lakh crore and held ₹1.10 lakh crore in cash as of May 31, 2025.

According to market experts, high cash levels typically signal either an anticipation of better entry points or a scarcity of fundamentally strong companies trading at reasonable valuations. Many managers would rather hold cash than deploy it into overheated stocks, preferring to protect capital until risk-reward dynamics improve.

Interestingly, similar patterns were observed during previous market cycles, in December 2011 and November 2018, when the Nifty was near peaks but broader participation from midand small-caps remained tepid. These episodes highlight that high cash positions often precede selective deployment when valuation pockets begin to cool, rather than signalling outright pessimism.

Cash also gives managers flexibility, to meet redemption needs or act swiftly during market corrections. As global uncertainties like geopolitical tensions and earnings slowdowns fuel volatility, some fund houses are preparing defensively. ICICI Prudential Mutual Fund, for instance, notes that while valuations have moderated from earlier peaks, they remain elevated, warranting caution.

Is this cash strategy an act of risk aversion or deliberate patience? This cover story explores what rising cash levels in active funds really signal, with a spotlight on schemes like PPFAS that treat cash as an integral part of their investment process. In a market priced for perfection, it may be restraint, not reaction, that delivers the real alpha.

When Cash Becomes the Conviction: What Mutual Fund Piles Say Amid Stretched Valuations

As the Nifty 50 trades at a TTM P/E of 23x, above its three-year median of 22x, India’s equity market stands at a critical inflection point. Amid these rich valuations, many fund managers are choosing caution over complacency. To decode this trend, we examined 60 top equity mutual fund schemes across six core categories. These funds, managing a combined ₹15.48 lakh crore, held ₹1.10 lakh crore in cash as of May 31, 2025. While cash may seem like a drag during bull markets, seasoned managers see it as strategic dry powder, ready to be deployed when valuations correct.

Flexi-cap funds lead this trend, holding ₹40,489 crore or 36.6 per cent of total fund cash, followed by mid-cap funds at ₹26,525 crore (23.96 per cent) and small-cap funds at ₹19,607 crore (17.71 per cent). Unsurprisingly, these are also the segments where index valuations have significantly exceeded historical norms. The Nifty Midcap 150 currently trades at a P/E of 34.26x (vs. a 3-year median of 26.8x), while the Nifty Smallcap 250 stands at 32.19x (vs. a median of 26.7x).

Top Schemes Holding the Most Cash

Among retail favourites, the Parag Parikh Flexi Cap Fund (PPFAS) leads with ₹23,712 crore in cash, 22.83 per cent of its total AUM. It is followed by Motilal Oswal Midcap Fund with ₹9,471 crore (31.18 per cent), HDFC Flexi Cap with ₹7,466 crore (9.86 per cent), and SBI Small Cap Fund with ₹6,208 crore (18.25 per cent).

Understanding the Logic: Why Do Mutual Funds Hold Cash?
In a market buoyed by optimism and stretched valuations, especially in mid- and small-cap segments, many mutual funds are consciously choosing caution over full deployment. Elevated cash holdings in value, mid-cap, and flexi-cap funds reflect not fear or indecision, but a disciplined investment stance. Funds like Parag Parikh Flexi Cap (PPFAS), which holds over 22 per cent of its assets in cash, treat this as a core strategy rooted in valuation prudence. Like Test cricket, investing requires patience, the willingness to wait for the right opportunity instead of chasing overvalued stocks.

These funds prefer to keep dry powder ready to deploy when markets correct or attractive IPOs emerge. It’s less about timing and more about readiness to act on high-conviction ideas at reasonable prices.

Cash also serves a practical purpose. Open-ended mutual funds need liquidity to manage redemptions without distressselling quality holdings. It acts as a buffer during volatile periods or macroeconomic shocks such as geopolitical tensions or global rate changes. With a pipeline of issuances, including IPOs, OFSs, and promoter exits, fund managers are preserving liquidity to act decisively.

Funds with more illiquid portfolios or volatile investor bases tend to carry higher cash reserves. At a macro level, factors like a stable rupee, easing crude prices, and potential RBI rate cuts could create more attractive entry points ahead. In this light, rising cash levels are not a sign of retreat, but a calculated strategy for long-term resilience and return optimisation.

Strategic vs. Philosophical: A Divided Approach to Cash Holdings
A closer look at the top 10 equity mutual fund schemes in each category reveals a clear divergence in cash strategy. While the average cash holding across these 60 schemes is 5.7 per cent, category-level differences are telling. Mid-cap and flexi-cap funds hold the highest average cash at 8.12 per cent and 8.50 per cent, respectively, signalling valuation concerns in broader market segments. Some, like Motilal Oswal Midcap Fund, are sitting on over 31 per cent cash, while others remain nearly fully invested. In contrast, large-cap and multi-cap funds hold lower averages of 3.75 per cent and 2.76 per cent, reflecting greater comfort with valuations in their space.

This divergence reflects a broader debate within the fund management industry. Some managers view cash as a vital tool in active management, used to manage volatility and await better opportunities. Others believe that decisions on equity vs. cash allocation should rest with the investor or advisor, not the fund manager. Taking cash calls involves timing both exit and re-entry, which introduces significant risk.

The PPFAS Playbook: Patience Over Participation
Among India’s most followed equity schemes, Parag Parikh Flexi Cap Fund (PPFAS) has charted a unique course, opting for cash over conviction-less investing. As of May 2025, it held 22.83 per cent of its ₹1.03 lakh crore AUM in cash, making it the industry’s highest cash-holding scheme. But this isn’t a tactical pause, it’s a core tenet of PPFAS’s philosophy, built on capital preservation and valuation discipline.

Why Is PPFAS Holding So Much Cash?
PPFAS treats cash as a strategic reserve. As the fund puts it: ‘We hold cash not to avoid the market, but to be ready to deploy when good businesses come at good prices.’ This dry powder approach enables swift deployment when market dislocations reveal value. Crucially, high cash isn’t about timing, it’s a byproduct of their bottom-up, high-selectivity investing style.

Cash as a Shock Absorber and Conviction Filter
During the October 2024 to February 2025 correction, PPFAS’s cash buffer helped contain downside, even if it meant lagging the rebound. The fund is comfortable holding 15–25 per cent cash when valuations are excessive, especially in overheated small- and mid-cap segments. This stands in contrast to large-cap funds, which typically stay 95–98 per cent invested due to mandate constraints and liquidity needs.

Philosophy Over Forecasting
Fund Manager Rukun Tarachandani emphasizes that cash levels are not based on macro predictions but stem from a simple belief: if there are no suitable opportunities, the fund will wait. While this may lead to underperformance in bull markets, it builds resilience and long-term investor trust.

Does Cash Hurt Returns? A Pragmatic Performance Perspective
The core debate around cash in mutual funds boils down to one question: Does it hurt returns? The answer depends on the market cycle.

Cash as a Downside Cushion
In downturns, conservative funds like PPFAS often outperform. In the 2018 correction and the COVID-led crash of 2020, cash helped reduce drawdowns and preserve capital, key to the value investing credo: avoid permanent capital loss first, pursue returns later.

The Recent Trade-Off: Missed Momentum?
However, in bull runs, high-cash funds tend to underperform. For instance, from April to July 4, 2025:

While underperformance is visible in some high-cash funds, it’s a strategic choice, especially when small and mid-cap valuations appear stretched. As one CIO put it, ‘The real test of a fund’s approach isn’t how it performs in a rally, but how well it preserves capital in uncertainty.

Diverging Philosophies: To Hold or Not to Hold?
Fund houses are split in their views. Edelweiss AMC and ICICI Direct oppose holding large cash positions. Edelweiss CIO Trideep Bhattacharya believes fund managers should focus on stock selection, leaving asset allocation to advisors. In contrast, Quantum AMC, which holds around 12 per cent cash, sees it as a natural outcome of valuation discipline, not a tactical hedge. Ultimately, while cash may dent short-term alpha, it helps build long-term resilience, especially when markets turn volatile.

Investor Education: How to Interpret Cash Holdings Like a Pro
For many investors, seeing 10–20 per cent of a fund's assets in cash may raise doubts: ‘Is the manager being too conservative? Am I missing out?’ But in reality, cash can be a strategic asset, especially in value-driven or patient-capital funds. A cash level above 10 per cent usually signals either market caution or a wait for better entry points. Look at where the cash is parked, typically in overnight or liquid instruments like TREPS. Also consider history: is this a one-off or part of a consistent philosophy? Fund manager commentary often reveals intent. If they say they’re ‘waiting for valuations to align,’ and have acted similarly before, it shows conviction, not indecision.

Take Parag Parikh Flexi Cap Fund, for example. CIO Rajeev Thakkar compares their approach to playing Test cricket. waiting for the right ball. Similarly, Quantum AMC's Chirag Mehta stresses that investing for the sake of staying fully deployed is poor stewardship if valuations don’t justify it. On the other hand, Edelweiss MF and ICICI Direct maintain minimal cash exposure, focusing instead on staying fully invested and managing risk through stock rotation.

For investors, it boils down to style preference. Conservative investors may value funds that wait patiently during frothy markets. More aggressive investors may prefer fully invested funds that capture every uptrend, even if they face sharper drawdowns during corrections.

Key Takeaways for Investors:
■ High cash ≠ inactivity: It often signals a valuation-aware, patient strategy.
■ Look for consistency: Funds with a pattern of high cash during market peaks may offer better downside protection.
■ Align with your style: If you prefer long-term compounding over chasing rallies, such funds may suit your temperament.
■ Cash provides flexibility: It allows managers to act during corrections, dislocations, or IPO rushes, without panic selling.

Conclusion: Cash Is Not Cowardice - It’s Conviction
In today’s frothy market, especially in mid and small caps, rising cash levels in mutual funds are more than just a defensive move. They signal discipline, flexibility, and long-term thinking. Funds like PPFAS, Motilal Oswal Midcap, and Quantum AMC aren’t fleeing the market, they’re simply not chasing it. Their cash buffers reflect a commitment to valuation sensitivity and conviction-led deployment. Meanwhile, other funds choose to stay fully invested, managing risk through diversification and active stock picking.

There’s no one-size-fits-all answer. Investors must ask: Does my fund manager’s philosophy match my own? If your goal is long-term wealth with a margin of safety, a fund holding 15–20 per cent in cash might serve you well in uncertain times. High cash funds may lag in bull runs but could outperform on a risk-adjusted basis when markets correct. Low-cash funds, if managed with discipline, also have their place for those seeking aggressive participation.

Final takeaway? Don’t judge a fund by its cash holding alone. Judge it by how thoughtfully that cash is used. In overheated markets, cash isn’t complacency, it’s clarity. And in investing, clarity is one of the rarest and most valuable assets.

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