Mutual funds boost TREPS allocation to protect returns from market volatility

In an effort to safeguard returns at a time of heightened market volatility, fund managers have increased their allocation from equity schemes to Tri-Party Repos (TREPS) market – a short-term money market instrument – compelled by worries over tariff uncertainty, high equity valuations and muted earnings growth.

Data from PrimeMFDatabase shows that 14 mutual funds have increased their allocation to TREPS between April and July 2025 by as much as 0.02% to 9.30% of their equity assets under management (AUM).

TREPS, a type of short-term money market instrument, is being increasingly used as a tactical allocation tool to manage risk during periods of uncertainty, such as the current environment marked by US tariff concerns, elevated valuations, and subdued earnings growth expectations for FY26.

The funds making this shift include Aditya Birla Sun Life MF, Bajaj Finserv MF, Bandhan MF, Bank of India MF, Groww MF, JM Financial MF, LIC MF, Mirae Asset MF, NAVI MF, NJ MF, Old Bridge MF, Samco MF, Trust MF, and UNIFI MF. This is not uncommon, as fund houses often adjust their cash holdings on a regular basis for many reasons. The goal is to hold on to the cash till the right opportunity arises or as a form of protection.

“Mutual Funds increased their allocation to cash (TREPS) amid prevailing uncertainty in the stock market, driven by concerns over US tariffs, relatively unattractive valuations and muted earnings growth expectations for FY26,” said Mataprasad Pandey, Vice President with Arete Capital Service.

Additionally, Shweta Rajani, Head – Mutual Funds at Anand Rathi Wealth said TREPS yields have remained attractive, averaging around 5.65% in May 2025, compared to 6.4-6.5% earlier in February, and still offered a spread over idle cash. “Banks even captured 20-30 basis points arbitrage, at times as high as 60 bps intraday, versus the RBI’s 6 percent SDF rate.”

Higher allocation to TREPS allows portfolios to maintain immediate liquidity, safeguard Net Asset Value (NAV) during market drawdowns, and generate incremental returns on an otherwise idle capital. While this approach may cap potential upside during sharp equity rallies, it offers stability and tactical flexibility during unpredictable market phases.

A higher allocation to TREPS shows that mutual funds appear to be adopting a ‘wait-and-watch’ strategy – prioritizing capital preservation and nimble maneuvering over aggressive equity bets, at least until the current volatility subsides.

The use of TREPS is becoming increasingly widespread, as Prime Database showed that by July 2025, 89.71 percent of equity schemes had exposure to cash equivalents like TREPS, CBLO (Collateralized Borrowing and Lending Obligation), or reverse repos, up from 88.85 percent in May. In just two months, 18 additional equity schemes have begun using these instruments to manage cash positions.

After two consecutive months of decline in equity markets, mutual funds are clearly holding on to higher cash buffers. Data from ACE Equities shows that aggregate cash holdings in equity schemes rose to 3.77 percent in July, from 3.68 percent in June. In absolute terms, reserves increased from Rs 1.55 lakh crore to Rs 1.58 lakh crore month-on-month.