Mutual Fund cash holdings might go up more in the coming Quarters

 Mutual Fund Industry's Cash Holding Trends (Mar '23 – Mar ''25)

Will the cash holding of Indian Mutual Fund grow in the coming days?   How is the U.S Mutual Fund Industry behaving with cash holdings? How does the global Mutual Fund Industry deal with cash holding?  Before we get into the biggest question in our minds about all the above questions, we need to calculate the upcoming risks hidden under the table.

Don’t be surprised if Trump kicks out Powell. We know that Trump did not re-appoint the previous Fed chairman, Janet Yellen,  for a second term as Fed chair. More retaliation of tariffs will begin since the ego war is not over. The impact of tariff negotiation for many economies will be where countries like Europe might face budget cuts, some with tax cuts or more borrowing, slowdown or stimulus packages from many countries, etc. The UK spends more than £100 billion a year on debt interest payments. This is more than it spends on education or investment.

The amount increased rapidly in recent years due to the global financial crisis and the COVID pandemic. And, relatively speaking, the UK spends more money on paying interest on its debt than other G7 economies (3.3% of its GDP compared with the G7 average of 1.7% in 2022).

As the fear of global inflation goes up, the risk of bonds also goes up. Many countries have more inflation-linked debt than comparable economies. For example, one-quarter of the UK’s debt repayment is linked to inflation, which is double that of Italy, the next highest in the G7, at 12%. And, as everyone in the UK has experienced, inflation has been high in the past few years. A GDP cut down leads to a tax revenue cut down and a fall in government revenue. Hence debt market is yet to witness a Tsunami. Further rating downgrades of papers can't be ruled out. Many bonds and corporate debt might default due to the slowdown.

Now Mutual Funds Global and & India

Globally, equity mutual funds typically hold 1–5% of AUM in cash, with some funds (e.g., value or conservative funds) holding up to 7–10% to manage redemptions, seize investment opportunities, or mitigate market volatility. Debt and money market funds often hold higher cash levels due to frequent withdrawals.

The  U.S. mutual fund AUM grew from $21.52 trillion in 2024 to $22.89 trillion in 2025.  Cash levels in U.S. equity mutual funds dropped to a record low of 1.3%, down from ~1.5% at the start of the 2022 bear market. This reflects aggressive deployment into equities amid market optimism.  Long-term mutual funds saw outflows of $44.83 billion in the week ending April 9, 2025 (0.2% of assets), suggesting some reallocation to ETFS or other vehicles, reducing cash buffers

India

Fund managers increased cash to navigate global uncertainties and domestic market corrections, particularly in mid- and small-cap segments.  Higher cash holdings align with a defensive strategy, with increased allocations to telecom, healthcare, and cyclicals. This suggests fund managers are balancing growth and risk mitigation.

Cash holdings grew significantly from ₹1.33 lakh crore (2.4% of AUM) in March 2023 to ₹2.05 lakh crore (5.86% of AUM) in March 2025. This represents a 54% increase in absolute cash and a more than doubling of money as a percentage of AUM. The Indian mutual fund industry's AUM expanded from ₹40.5 lakh crore in March 2023 to ₹65.74 lakh crore in March 2025, a 62% increase. Equity AUM grew by 26% YoY to ₹32.3 lakh crore by March 2025. The increase from 2.4% to 5.86% of AUM in cash reflects a cautious approach amid market volatility, particularly in mid- and small-cap segments.

In Feb 2025, Cash holdings stood at ₹1.87 lakh crore, with active equity schemes holding 5.3% of AUM in cash.   In March 2025 cash holdings increased by ₹18,061 crore month-on-month to ₹2.05 lakh crore, representing 5.86% of total AUM. Active equity schemes slightly reduced cash to 5.1% of AUM, down from 5.3% in February, despite a strong market rally (Sensex up 5.5%, Nifty up 6.2%).

Equity funds increased allocations to defensive sectors like telecom (up 30 basis points to 29.7%) and healthcare (7.6% weight), while reducing exposure to technology (down 20 basis points to 8.5%). Domestic cyclicals (e.g., private banks, retail, infrastructure) saw a 30 basis point increase to 61.5%.

In contrast, U.S. equity mutual funds reduced cash to a record low of 1.3% by February 2025, reflecting aggressive investment but limited liquidity. These trends highlight divergent strategies: Indian funds prioritise flexibility, while U.S. funds bet on market growth. For 2025, Indian funds may adjust cash based on market trends, while U.S. funds face risks if volatility increases.

Conclusion:

Be prepared for more volatility and slowdown risks. Focus more on Indian markets and avoid global funds. Further, follow your risk profile and your asset allocation. Revisit your goals and timelines. Reduce the greed of clients and focus on the basics of investments, which have gone for a wild toss in the last 5 years, starting from covid 2020. STP and SIP amounts are to be doubled. Cash is king, but not for long.