As of June-17, stock markets are making a new all time high almost every other day. Although predicting stock market is virtually impossible, experts look at multiple indicators to gauge where the markets are headed and “Cash Component of Mutual Funds” is one such indicator.
Cash component is the percentage of total mutual fund money which fund manager has kept in cash(for investing in future). To simplify, if a mutual fund has a corpus of Rs 100(from all its investor) and it has kept Rs 20 in cash, then cash component of the fund would be 20%.
Normally, if the market is trading on high premium (stocks are expensive), mutual fund managers increases cash component at hand(so that they can buy stocks when the market falls). Conversely, if the market is trading low, mutual fund managers invest more money in the market and hence cash component reduces.
In June-2017, we are seeing conservative mutual fund houses increasing the cash components indicating that market is headed down in next few months.
Will the high cash component help conservative schemes Or will they miss out on the bull run of the decade? We will find in next few months.