The three-month average cash level in active equity mutual fund schemes stood at 6.2% in March, the highest in over six years, and up from 5.7% in January and 6.0% in February, show data compiled by Elara Capital. The last time cash positions were this elevated was in November 2018, at 6.3%, and in November and December 2011, at 6.4%, the data showed.

Cash holding levels typically average 3-4%.

Mahesh Patil, chief investment officer at Aditya Birla Sun Life AMC, said a rough calculation suggested that active equity schemes managed over ₹28 trillion, and typically have an average cash holding of around 3%, which would be about ₹84,000 crore. With cash levels now at about 6%, there would be another ₹84,000 crore waiting to be deployed, he said.

That would add up to an estimated total cash holding of about ₹1.64 trillion.

“If that capital starts flowing, it could offer strong support to the markets, particularly in the event of any sudden reactions to global or domestic uncertainties,” Patil said.

This “dry powder” could fuel a sharp rally when fund managers pump it into the market, but considering they are holding on to the cash now that could make it harder for retail investors to enter at reasonable levels.

The benchmark Nifty 50 index witnessed a strong rally in both 2011 and 2018 after cash levels hit similar highs, said Sunil Jain, vice president at Elara Capital. “However, market breadth remained weak (in 2018 and 2011), with gains largely concentrated in large-cap stocks.”

Both the Nifty 50 and the Sensex have slumped significantly from their peaks in September. But the benchmark indices gained significant ground last month despite the US tariffs, the attacks in Kashmir, and less-than-stellar corporate earnings.

One reason for fund managers holding on to cash could be the large pipeline of initial public offerings (IPOs), according to industry experts.

Ashish Gupta, CIO at Axis Mutual Fund, said nearly 30 companies have secured regulatory approval for an IPO and were awaiting favourable market conditions. In total, over ₹2 trillion worth of IPOs are poised to hit the market.

This suggests that a lot of capital may soon enter the market, and mutual funds could be keeping cash ready to invest in these new offerings, Gupta said, adding that the current 6% level was “far from worrisome”.

“If cash levels are elevated,” he said, “that alone sets the stage for a runway market.”

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A strong support

Cash mandates of equity mutual funds vary across schemes, driven by internal policies and portfolio strategies, and allow fund managers some discretion over how much cash they can hold at any given time.

According to Jay Kothari, global head of international business at DSP Mutual Fund, cash holdings are guided by multiple factors—valuation, stock price targets, IPO pipeline opportunities, and liquidity needs. “Cash call is more of an informed decision than a norm,” he said.

Kothari also said deployment of the cash holdings may not necessarily move the markets in a big way. “Markets typically react to factors like earnings growth,” he said, adding that there have been instances where flows were steady but indices corrected due to earnings downgrades.

Corporate India has seen fresh earnings downgrades following March-quarter results, particularly in the information technology services, oil and gas, and consumables sectors, according to a Kotak Institutional Equities note dated 26 April.

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Still, the medium-term outlook for the market remains constructive. Patil of Aditya Birla Sun Life AMC, said that after a recent correction phase and with no major overhangs, India is relatively better positioned than many emerging peers, particularly amid global tariff uncertainty.

Patil expects fund managers to start deploying cash as clarity emerges on the tariff front. “If that capital starts flowing, it could offer strong support to the markets, particularly in the event of any sudden reactions to global or domestic uncertainties,” he said.

Sorbh Gupta, senior fund manager–equity, Bajaj Finserv AMC, said internal policies limit how much cash a fund can hold, reinforcing the likelihood of deployment sooner than later.

He added that domestic institutional investors (DIIs) now have enough heft to counterbalance foreign flows. If DIIs step up buying and foreign portfolio investors (FPIs) stay engaged, that could provide a strong floor to the market.

After nine straight sessions of selling, foreign institutional investors (FIIs) recently turned buyers, picking up stocks for 10 consecutive sessions through 29 April. Domestic institutional investors were net buyers for three sessions leading up to 29 April after being sellers in the three sessions prior.

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