Cash calls surge in equity funds — Will investors pay the price of rising cash levels?

Cash calls, where equity fund managers hold a significant portion of the portfolio in cash, are one of the most debated tactics in active fund management. According to data from Prime MF, cash holdings in equity mutual fund schemes saw a continued rise in April 2025, as 53% of 43 fund houses increased their cash allocations compared to March. This indicates a cautious approach by fund managers in light of market uncertainty. 

Niranjan Avasthi, Sr. Vice President, Edelweiss Asset Management Limited, in a recent post, noted that in equity fund management, one of the most contested strategies is the use of cash calls, when fund managers hold a portion of the portfolio in cash rather than staying fully invested in stocks. The idea is simple: hold back during uncertain or overvalued markets to avoid losses, and re-enter once conditions improve. But in practice, this strategy rarely plays out as intended.

“One of the most debated topics in fund management is the role of cash calls in equity portfolios. I analysed three equity funds (Flexicap and Midcap categories) since Jan 2020 and the results were not surprising. These funds frequently took cash calls, taking more than 5% cash, aiming to protect the downside and re-enter the markets on its way up. But in reality, the timing often didn’t work and it dragged the investor’s overall return,” Avasthi posted on X, formerly Twitter.

He elaborated his point by analysing three popular equity funds (across Flexicap and Midcap categories) since January 2020. He noted that this strategy often does more harm than good.

All three funds frequently held more than 5% of their portfolios in cash, with the aim of mitigating downside risk. But in reality, the timing of these calls often didn’t align with actual market cycles, leading to significant return drags:

Fund 1 (Flexicap) held cash >5% in 54 of 64 months, resulting in a -7.2% return drag.

Fund 2 (Midcap) took similar calls in 50 months, dragging returns by -8.1%.

Fund 3 (Midcap) followed suit in 45 months, seeing a -7.9% return hit.

What’s more telling is that the market benchmark actually fell more than 1% in only 16 to 18 months during this entire period. That means fund managers were often too early in pulling out—missing gains in rising markets—and too late in getting back in, losing out on recovery rallies. In effect, their attempts to ‘protect’ the portfolio led to missed opportunities.

Supporters of cash calls argue they offer protection and flexibility, but this clashes with the core investing principle: “Time in the market beats timing the market.” Equity funds are designed to be long-term growth vehicles and should ideally stay fully invested.

Markets at this point

According to data from Prime MF, the overall cash holding increased by Rs 20,834 crore to reach Rs 1.73 lakh crore. Flexi-cap funds held the highest total cash amount among equity mutual fund categories, followed by mid-cap and small-cap funds.

Several major fund houses experienced significant growth in their cash positions. ICICI Prudential Mutual Fund saw a Rs 3,987 crore increase, representing a 22.26% rise. HDFC Mutual Fund raised its cash holding by Rs 3,154 crore (17.28%), while SBI Mutual Fund increased its cash reserves by Rs 2,443 crore (9.25%).

DSP Mutual Fund also saw a notable increase in its cash reserves, rising from Rs 5,892 crore to Rs 6,949 crore. Its cash position increased from 5.20% in March to 5.98% in April. PPFAS Mutual Fund also experienced a significant increase in cash allocation, with its percentage rising from 13.64% to 16.41%.

What should investors do

Supporters of cash calls argue they offer protection and flexibility, but this clashes with the core investing principle: “Time in the market beats timing the market.” Equity funds are designed to be long-term growth vehicles and should ideally stay fully invested, Avasthi stated.

The better approach? Asset allocation decisions like holding cash or de-risking should be taken at the investor’s portfolio level, not within a pure equity fund. When fund managers try to time the market on your behalf, it often ends up costing more than it saves.