With a fear of a prospective fall in the market, fund managers have decided to revise their investment strategies in the field of equity schemes. They are increasingly hiking their cash holdings in products, while at the same time, trimming their exposures in Futures and Options (F&O) that were initially used as hedges to protect the portfolio of their stock. This hike in cash holding is a strategy to protect their portfolios from reducing in value and preventing further decline in value of funds. With increased cash levels, mutual funds can cash in on opportunities at the time of a fall in the performance of the market, thereby reducing their portfolio losses significantly. Besides this, fund managers are also trading in index options to capture and move along with the flow of broader market movements.
At the same time, fund managers have reduced their involvement with option strategies due to the sharp gyrations and fluctuations in the index, which has made it exceedingly difficult for them to make money from these contracts. With a rise in the volatility of markets due to global causes, the performance of the market in the near future is under negative light. As a result, analysts believe that this strategy of holding cash funds is not going to be quite beneficial in the long run as fund houses will start missing out on opportunities in case the market rallies. Portfolios will also be largely impacted as there is a big risk of fund’s losing their investment opportunities, when fund managers stick to holding their cash. Many are of the belief that investments in defensive stocks will be a far more tactical move than making a scattered attempt to hold cash. Fund managers may also find it increasingly difficult to adjust and align when there is a rise in the value of stocks.
As a prudent investor, it is mandatory that you know your fund manager very well. Because it is his explanations based on which you will be giving your call. Firstly, it is important to understand the alignment of your fund manager’s policies with those of yours. If you are a risk averse investor who has opted the path to investments with the main aim being savings for financing your post retirement life or for the completion of a financial requirement such as buying a house without opting for a home loan or for accumulating funds for your child’s future without opting for a personal loan you need to choose a fund manager who has similar fundamentals. If the fund manager is inclined more towards exposure to risk then your funds might face a setback in the eventuality of a market crash, since greater exposure to risk would mean investing most of your savings into equities. Opting for debts like personal loans or a home loan to finance your requirements should be a road not taken if you are deciding to invest. In order to safe guard yourself from such debts ensure that you link your goals to your investments and design the tenor in a way such that the amount required for completing a task are accumulated during the course.
Thus, fund managers need to make more mature moves in order to counter the depressing performance of the market, which is likely to continue for quite some time in the future. While cash holdings may provide temporary respite to funds and their fund managers, it may hamper a fund’s chance of making more profits in the long run. They may be forced to stick to routine investment patterns, taking a far more proactive approach than what may be demanded by the market at these times.