Mutual Fund Cash Level

What Is Mutual Fund Cash Level?

Mutual fund cash level is the percentage of a mutual fund's total assets that are held in cash or cash equivalents. Mutual fund cash levels are an important part of managing liquidity in mutual funds. Most mutual funds keep around 5% of the portfolio in cash and equivalents in order to handle transactions and everyday redemptions of shares.

How Mutual Fund Cash Level Works

Funds that actively use derivatives or different instruments that might require collateral positions and increased cash levels for other transaction types might hold higher levels of cash.

Until 2016, there were not very many regulations targeting the cash levels of mutual funds, giving mutual fund managers scope to manage cash holdings at their discretion. In 2016, the Securities and Exchange Commission (SEC) issued a few new rules and regulations pertaining to mutual fund liquidity management.

These new rules and regulations are effective as of December 2018. Their aim is to assist with increasing liquidity and offer greater help for investors who try to buy and reclaim shares.

Special Considerations

Generally, mutual funds have the flexibility to manage cash positions at their discretion. In many cases, these cash positions are trailed by market examiners and adjusted in light of the market outlook.

Cash levels can commonly be found in a holdings breakdown or they may likewise be uncovered as short-term reserves. In addition to cash, cash levels likewise include cash equivalents, for example, money market investments that can earn returns of around 2% while as yet providing the equivalent liquidity as cash.

For investors, cash levels can signal a collective sense of fear or good faith about the broad markets. For instance, assuming aggregate mutual fund cash levels are above 10%, this would signal that fund managers are generally bearish about the market and holding back on making new purchases. On the other hand, cash levels in the range of 3% to 8% would signal a generally bullish stance, as most accessible cash is being put to work in the market.

There may likewise be different reasons that a fund decides to hold higher levels of cash. A few funds might keep cash on hand for making optimal investments in new securities when new opportunities are presented. Different funds might keep high levels of cash in order to ensure the payout of distributions. Overall cash levels can be an important part of a fund's operational strategy in light of multiple factors.

Requirements for Mutual Fund Cash Level

The SEC's mutual fund liquidity initiative adds a new rule to the Investment Company Act of 1940. Rule 22e-4 will require registered funds to foster a written liquidity risk management program. Part of this program expects that funds ensure they don't invest over 15% of their net assets in illiquid investments.

Different changes and modifications influence the filings and swing pricing procedures of a fund. New requirements for filings include a new Form N-LIQUID, new requirements for Form N-CEN, new requirements for Form N-PORT, and amendments to Form N-1A. New legislation regarding swing pricing will permit fund companies to make net asset value adjustments for purchases and redemptions. These changes are outlined in amendments to Rule 22c-1 and amendments to Regulation S-X.

Overall, the SEC is seeking to make purchases and redemptions of mutual funds more straightforward for investors. Thus, the new regulations add requirements for liquidity risk management programs, illiquid positions, and greater reporting of cash positions.

Highlights

• The mutual fund cash level is the total percentage of a mutual fund's assets in cash.
• Funds that actively use derivatives or different instruments that might require collateral positions and increased cash levels for other transaction types might hold higher levels of cash.
• Most mutual funds keep around 5% of the portfolio in cash and equivalents.