Investing in mutual funds isn’t only about where you park your money but also about how much of it is kept on the sidelines. Indian mutual funds’ cash holdings are at 4.99% as of August 2025, and during the period, they held ₹1.98 lakh crore in cash, according to AMFI data.
Is it increasing, decreasing – what does it bode for your holdings?
This blog is to break down what is ‘cash holdings’ in mutual funds, why to hold cash,how much cash is typically held, and how it affects your returns.
What Is Cash Holding in a Mutual Fund?
Cash holdings in a mutual fund is part of the fund’s total assets which is cash or cash equivalents and is not invested in stocks, bonds, or any other securities. These holdings act as a reserve in case investors request redemption or capture any other investment opportunity, if raised.
However, higher cash holdings may sound cautious due to the high valuation of stock or fluctuation in the market. Lower cash holdings offer an optimistic look at the market.
Why Funds Hold Cash (Liquidity & Redemptions)
Let’s elaborate on why mutual funds mainly hold cash for:
- Reserve For Redemptions: When investors withdraw or redeem the capital, the fund must have enough cash-in-hand to pay them without disturbing their investment strategy.
- Buffer Against Volatility: Holding cash reduces risks in uncertain markets and provides stability.
- Capturing New Opportunities: In certain situations, where stock market prices fall, fund managers can step in to buy quality stocks at attractive prices.
- Preservation of capital: Fund managers may hold cash in order to protect capital instead of investing in expensive equities when market valuations are high or uncertain.
Typical Cash Holdings (%)
Usually, cash holdings are 3%–5% in the case of equity funds, but some may go over 10% under certain conditions. However, the levels of cash holding depend on fund type, market scenario, and the fund manager’s strategy.
As of August 2025, total mutual fund cash holdings stand at ₹1.98 lakh Cr (4.99% of AUM). Total active equity mutual funds’ cash holdings stand at ₹1.49 lakh Cr.
If we go further, based on fund houses, as of August 2025, SBI MF cash holdings are ₹31,416 Cr which is 4.36% of AUM, PPFAS MF stands at ₹26,925 Cr at 22.33%, which is concerningly very high.
Cash vs. Cash Equivalents
Cash refers to cash-in-hand or cash-at-bank(demand deposits), which are ready for liquidity.
Cash Equivalents are highly liquid and short-term investments that are ready to encash a known amount of money or cash; they usually hold insignificant risks. They can be traveler’s cheques, bank cheques, and money market instruments like treasury bills, commercial paper, and certificates of deposits.
Factors That Influence Cash Holdings
- In case of market valuation, if the market tends to look overheated, the fund manager increases cash holdings.
- Market volatility, like geopolitical events, changes in various financial rates, and market uncertainty, raises the bar for buffers.
- Investors’ actions towards redemption demand a cash reserve. If the redemptions are higher, the fund needs more holdings.
- Some funds mandatorily need to have cash holdings to offer higher liquidity.
- If the fund manager is aggressive, they may run low cash, whereas conservative ones run high.
Recent Trends: March 2025 Peak Levels
The recent trends in cash holdings of mutual funds went through various changes from December 2024 to August 2025. Let’s dive more into these shifts!
As of March 2025, mutual funds had the highest cash holdings in 15 years, which stood at ₹1.96 lakh Cr.
However, the total cash holdings of active mutual funds declined to 5.3% of AUM in July 2025.
According to the latest available data, mutual fund cash holdings went below 5% in August 2025, standing at ₹1.98 lakh crore, which marked a 9-month low of 4.99% compared to 5.17% in December 2024.
Pros & Cons of Holding Cash
Pros:
- Provides liquidity to meet redemption needs without disturbing the investment plan.
- Reduce risks during market volatility.
- Opportunity to buy at an attractive price whenever the market falls.
Cons:
- Lower returns on investments due to excess holding of cash, as it reduces potential gains.
- The cash or money may lose its actual value over time due to inflation if returns are low.
- Holding a higher level of cash raises cautiousness or the pessimistic nature of fund managers.
Conclusion
So far, we have understood that cash holdings in mutual funds act like an emergency fund, which provides flexibility and safety during redemption or market uncertainty. Often, a lower percentage is meant to be healthy, while a higher percentage is considered cautious.
For making a better investment decision, investors must consider the cash reserve ratio of the funds, as it affects the returns.
FAQs
Yes, cash holdings affect returns on funds by reducing the potential for gains by holding the cash.
Usually, the cash holding fluctuates between 3–5% or sometimes higher up to 10% depending on certain situations; the mutual fund cash holdings currently is 4.99% of AUM, as of August 2025.
Mutual funds keep cash as a reserve or buffer against redemption, market volatility, arising opportunities, or mandatorily due to legal obligations.
Cash can be stated as cash-in-hand or cash-at-bank. Whereas cash equivalents are highly liquid and short-term investments like traveller’s cheques, bank cheques, and money market instruments like treasury bills, commercial paper, and certificates of deposits.
Yes, it does indicate fund manager caution or market outlook, as managers may view markets as uncertain or stocks as overvalued, depicting a defensive strategy.
