Cash holdings of mutual funds! (Part II)

The fund manager decides to hold cash based on their judgment of where they believe the market is headed. If a manager is uncomfortable with current valuations or market direction, they may prefer to keep some cash on hand as a precaution. When a fund holds a large amount of cash, it risks missing out on market rallies, leading to potential underperformance that long-term investors may not appreciate. However, in the event of a market downturn, these funds are less impacted and can use the available capital to buy assets at lower prices. High cash reserves are essential in small and mid-cap funds holding illiquid shares. In the event of redemption pressure, this cash is a cushion, allowing fund managers to avoid the forced sale of illiquid stocks during market panic. The high level of cash in funds is good news for the primary market, where funds will get an opportunity to participate in new and promising companies at the best possible pricing.