Cash is King!

Amidst a turbulent sail in the debt markets, a large cash component has emerged as a reliable anchor for debt and gilt funds. Debt fund managers are now not only glued to the debt markets; they are frantically tracking the daily transactions by foreign institutional investors in equity markets, the depreciation of other currencies in the region vis-à-vis the rupee and keeping a close tab on the Federal Reserve. With liberalisation breaking the walls of a closed economy, the Indian fund manager's job has become that much more difficult.

"You never know where the next shock may come from. In such a period of high uncertainty, cash is king for us," quips the chief investment officer of a mutual fund. The gradual hardening of interest rates received a fillip on July 21 when the Reserve Bank of India hiked interest rates to defend a gullible rupee. Since then, the debt markets have been in turmoil with a weakening rupee keeping fund managers on the edge of their seats.

"With a gradual inching up of interest rates, we had shifted to short-term securities to cut losses. However, the sudden tightness in the market has led to a sharp fall in the short-end of the markets as well, forcing us to hold a part of the corpus in cash," says a debt fund manager. "Even in our short-term debt fund, 90 per cent of the holding is in cash since we do not want the net asset value of a short-term debt fund to fall," adds the chief investment officer of a mutual fund.

For instance, Alliance Liquid Income from Alliance Capital had a 20 per cent cash component on July 31, 2000. "Our strategy has been to increase cash exposure substantially to about 20 per cent of the fund and to re-invest as and when an opportunity presents itself. We plan to continue to increase liquidity in the portfolio," says Vineet Udeshie, fund manager. On the other hand, the long-term plan of Alliance Government Securities Fund had a 40 per cent cash exposure on July 31.

However, the cash component in debt funds is not sitting idle. With overnight call money rates in double-digit mark, funds have been lending this money to earn healthy returns. The call rates have moved up as RBI has been sucking out liquidity from the system. On Wednesday, call rates were hovering around 15 per cent. "We are holding around 18 per cent in cash in Templeton India Income Fund while the cash component is around 30 per cent in the gilt fund. By lending in the call money market, we are adding to returns," says Nilesh Shah, chief investment officer, Templeton Mutual Fund.

Apart from lending in call money markets, a high cash component will also help debt funds buy medium-to-long term bonds at attractive prices, once interest rates are expected to ease. "We have around 25 per cent of the portfolio of JM Liquid in cash. While we plan to continue with a defensive strategy and increasing exposure to good quality paper in the one to two year maturity basket," says Nand Kumar Surti, fund manager, JM Mutual Fund.

With the debt markets witnessing a complete U-turn in sentiment, compared to earlier in the year, it might be a while before the harried fund managers can rest in peace!

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