Mutual fund cash exposure declines for the first time in six months

Equity mutual fund (MF) schemes reduced their cash holdings in May for the first time in six months, as geopolitical and trade tensions showed signs of easing.
According to a Motilal Oswal Financial Services report, the top 20 fund houses held 6.8 per cent of their portfolios in cash as of May 31, down from a record high of 7.2 per cent in April 2025.
Fund managers have been increasing cash levels since December 2024 amid a market correction and rising global uncertainties.
May brought relief on multiple fronts. Fears of an India–Pakistan conflict subsided after a ceasefire, while progress on the India–UK trade deal and easing the US–China tensions improved the trade outlook. Additionally, sustained foreign portfolio investor (FPI) inflows buoyed domestic market sentiment.
Benchmark indices extended their gains for the third straight month, with the Nifty and Sensex rising 1.9 per cent and 1.8 per cent, respectively.
Broader markets outperformed, as the BSE 500 surged 3.5 per cent, marking an improvement in market breadth after months of weakness.
However, domestic investor participation remained tepid. Equity MF inflows fell for the fifth consecutive month to ₹19,013 crore — the lowest in 13 months. Despite this, fund managers deployed cash aggressively, purchasing equities worth ₹49,000 crore in May, nearly triple April's buying.
Most major fund houses reduced cash levels. SBI MF, the largest, cut its cash holding from 10 per cent to 8.6 per cent, while ICICI Prudential's declined from 8.2 per cent to 6.9 per cent.
Cash levels are seen as an indication of the fund manager's view of the market. While MF executives maintain that their mandate is to remain fully invested, they strategically maintain some cash reserves during periods of market uncertainty.
However, according to experts, changes in cash levels in equity schemes can also be transitory due to major changes in portfolio or sharp inflow or outflow at the end of the month. The change in value of equity holding due to market movement also impacts the cash holding on a percentage level.
SBI MF maintained a 'neutral' stance on equities, citing balanced valuations, it said in a note.
'The sharp drop in 10-year bond yields over the past few months has meant that on our preferred gauge of equity valuations, which looks at equity yields as a relative spread to government bond yields, equity valuations stay near averages even with the uptick in equity markets over the past few weeks,' the report said.
'In addition, equity sentiment as measured by our proprietary framework stays in the neutral zone after the cool off from stretched readings of the past year through the correction,' it said.
'The recent drop in bond yields has kept equity valuations near historical averages, even after the market rally,' it added.
The fund house added that its proprietary sentiment indicators remain neutral after cooling off from the previous year's elevated levels.
In its latest outlook on the equity market, ICICI Prudential MF said that while the long-term structural story of India remains intact and there are tailwinds for economic growth to pick up, valuations remain an issue.
"Recent RBI actions like liquidity injection; key policy rate cuts, high dividends to the government are positive for India's business cycle and in turn may result in India's growth and corporate earnings to pick up. investors with a long-term view can remain invested in equity markets. However, due to high valuations. the fresh investments should be done prudently," it added.

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