A mutual fund cash-to-asset ratio is also referred to as a mutual fund liquidity ratio. This ratio is used to determine the level of liquidity of a mutual fund. In other words, it is a ratio that highlights the proportion of the number of assets that are held in the form of liquid cash by the mutual fund. Since cash is an indicator of a mutual fund’s liquidity as well as potential purchasing power, a high cash-to-asset ratio is a sure sign of higher liquidity.
What Is The Importance Of Mutual Fund Cash-To-Asset Ratios?
A mutual fund cash-to-asset ratio is a vital factor when ascertaining the extent of liquidity that a mutual fund possesses. In general, most mutual funds stock up on huge amounts of liquid cash whenever a sizeable purchase of securities is imminent. High cash-to-asset ratios are deemed to be bullish in nature, while low cash-to-asset ratios tend to be more bearish.
The significance of cash-to-asset ratios can be better outlined in the following ways :
- Cash-to-asset ratios help fund managers make informed choices about what stocks to invest in as well as the right time to invest.
- Cash-to-asset ratios also help fund managers read the market for improving trends as well as incoming downfalls.
- Cash-to-asset ratios are an effective tool when it comes to the management of an investor’s portfolio by a fund manager.
What Do Low Cash-To-Asset-Ratios Indicate?
- Mutual funds with a low cash-to-asset ratio may indicate that the fund has opted to park its assets in bonds, annuities and other investment options that come with a low level of risk. This is why mutual funds that display these characteristics are considered to be bullish.
- Mutual funds with a low-cash-to-asset ratio also tend to indicate that the fund is completely invested and that the fund managers expect the markets to see an improvement in the near future.
- On the flip side, low cash-to-asset ratios may also indicate that fund managers are looking for a way to bring in cash due to the fund not doing as well as expected, or due to unfavourable conditions prevalent in the market at the time.
- Low cash-to-asset ratios could potentially be a sign of dropping rates of interest.
What Do High Cash-To-Asset Ratios Indicate?
- If a mutual fund holds a huge amount of liquid cash, ie: it has a high cash-to-asset ratio, it is generally viewed as being bearish in nature, since this could indicate that the fund is finding it difficult to zero-in on investment options or opportunities it considers to be of any quality.
- High cash-to-asset ratios tend to indicate that fund managers see volatile market conditions on the horizon, which leads them to stock up on their cash rather than investing it.
- High cash-to-asset ratios could also indicate a rise in rates of interest, which may drive fund managers to pull out their investments in stocks they consider to be a risk, and converting it to cash, which offers a much higher level of security.
- High cash-to-asset ratios may also indicate that mutual fund managers are biding their time and waiting for the right opportunity to present itself before going back into the market. This is also seen as a sign of an impending improvement in market trends.
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.