Mutual Fund Liquidity Ratio

What Is a Mutual Fund Liquidity Ratio?

A mutual fund liquidity ratio is a ratio that compares the amount of cash in a fund relative to its total assets. Mutual fund liquidity ratios can differ and may include cash or cash equivalents.

Understanding a Mutual Fund Liquidity Ratio

A mutual fund liquidity ratio is reported by mutual funds to furnish investors with insight into how much cash the fund is holding. Companies might report cash ratios or endlessly cash equivalent ratios, which is a more extensive measure encompassing cash equivalents that can be handily liquidated within a short period of time. The ratio is a simple percentage dividing either the total cash or the total endlessly cash equivalents by the fund's total assets.

Mutual fund cash levels are likewise followed closely by industry examiners as an indication of the market's direction. Most funds keep roughly 3% to 5% of their total assets in cash.

Finding the right cash balance is important for a mutual fund and its investors. Having too much cash on hand, meaning cash that isn't invested, isn't a helpful deployment of investment capital as it invalidates the point of investing. Investors give their cash to mutual funds so they can be invested and generate a return, most frequently through capital appreciation, as opposed to having it sit inactively.

Having a few levels of cash is important as it considers liquidity. Investments can find opportunity to unwind, in this manner, doing so to meet cash requirements can be risky in the event that the investments are currently at a loss. In this way, having cash on hand to meet unexpected cash needs or to pay for operating expenses is a prudent measure.

Industry Speculation

The Investment Company Institute gives a monthly report on mutual fund industry statistics, which includes information on the mutual fund industry's average mutual fund liquidity ratio. In April 2022, the Investment Company Institute reported a liquidity ratio across equity mutual funds of 2.5%.

Generally, investors might follow mutual fund industry liquidity to get a sense of money managers' collective viewpoint on the market. Liquidity ratios greater than 5% are expected to show some fear in the market's possibilities for gains with a bearish outlook. Liquidity ratios below 5% tend to show that money managers are more bullish on the markets and completely deploying all cash.

Mutual Fund Cash Regulations

Until 2016, mutual fund cash levels and mutual fund liquidity were not factors that were profoundly regulated. Notwithstanding, in 2016 the Securities and Exchange Commission (SEC) issued a few new rules pertaining to mutual fund liquidity management.

The agency's new rules went into effect in December 2018, adding a new provisions to the Investment Company Act of 1940. Changes are principally engaged around Rule 22e-4, which expects funds to document a comprehensive liquidity program and invest no over 15% of their net assets in illiquid investments.

Different changes include amendments to mutual fund registration Form N-1A as well as changes to Form N-LIQUID, Form N-CEN, and Form N-PORT. With the new rules, the SEC is seeking to help investors all the more effectively buy and reclaim shares while additionally instituting a few new boundaries for liquidity risk management and cash position reporting.

Features

Mutual funds need to find the right balance of cash levels; too much cash means money isn't being invested, losing out on returns, while too little cash means a fund isn't liquid enough to meet expenses and unexpected cash needs.
Investors might follow mutual fund industry liquidity ratios to get a sense of money managers' collective point of view on the market. Liquidity ratios greater than 5% indicate a bearish outlook while ratios below 5% indicate a bullish outlook.
Depending on how a mutual fund ratio is calculated by a specific fund, the cash levels can include just cash or likewise cash equivalents.
Most funds keep around 3% to 5% of their total assets in cash.
In December 2018, the Securities and Exchange Commission (SEC) began issuing new rules connected with mutual fund liquidity management and monitoring funds' adherence to these rules.
A mutual fund liquidity ratio is a ratio that compares the amount of cash in a mutual fund relative to its total assets.