The sharp dip in equity flows in November may come as a source of relief for some fund managers, especially in the mid- and small-cap segment where over a dozen equity schemes are still holding cash positions between 7 per cent and 20 per cent.
Industry experts say schemes that had been attracting investor flows are yet to find suitable investment opportunities to fully deploy investor funds.
"Some of the small- and mid-cap schemes had received significant investor interest. The mid-cap space is still tracking the over-valued zone. So, fund managers are cherry-picking in this space, as well as waiting for the right entry prices before deploying the funds," said Kaustubh Belapurkar, director of fund research at Morningstar.
According to fund managers, even though there has been a correction at the index level, quality mid-cap names have turned more expensive.
"Last year, the Nifty Midcap was trading at a healthy premium to the Nifty; now it is trading at a healthy discount. However, high-quality mid-cap names which are able to maintain healthy growth rates have turned more expensive," said a fund manager.
"On the other hand, if we look at beaten-down stocks, there is a risk of getting stuck in a value-trap, especially in the current conditions when different businesses are seeing disruptions," the fund manager added.
On average, small-cap schemes are sitting on the cash position of close to 7 per cent, while mid-cap schemes are sitting on the cash position of over 5 per cent. Even in large-caps, there is a build-up of cash, especially in schemes focusing on bluechip stocks.
"Within large-caps, bluechips have seen a run-up and fund managers would want to wait for reasonable valuations before building positions," said Vidya Bala, co-founder of Primeinvestor.in.
On Monday, the 30-share Sensex hit an all-time high of 41,185 points, before closing in the red. Bluechip-focused schemes are sitting on the average cash position of 6.2 per cent, shows an analysis of the data sourced from Value Research.
In November, equity flows were down 78 per cent at Rs 1,311 crore, falling to its lowest levels in three and a half years. In mid-cap schemes, investor flows had reduced 26 per cent to Rs 801 crore, while investor flows towards small-cap schemes had reduced 61 per cent to Rs 261 crore.
Industry observers say that holding cash may actually help fund managers limit downside in the current environment, but large cash component poses the risk of missing out sharp upsides in a broader market rally.
"Large cash positions in mid-cap schemes can become difficult to deploy quickly when there is a sharp run-up," Bala said.