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 aspect of managing liquidity in mutual funds. Most mutual funds keep approximately 5% of the portfolio in cash and equivalents in order to handle transactions and day-to-day redemptions of shares. Funds that actively use derivatives or other instruments that may require collateral positions and increased cash levels for other transaction types may hold higher levels of cash.

Until 2016, there were very few regulations targeting the cash levels of mutual funds, giving mutual fund managers latitude to manage cash holdings at their discretion. In 2016, the Securities and Exchange Commission (SEC) issued some new rules and regulations pertaining to mutual fund liquidity management. The new rules and regulations are effective as of December 2018. Their aim is to help increase liquidity and provide greater support for investors who seek to buy and redeem shares.

Generally, mutual funds have flexibility to manage cash positions at their discretion. In many cases these cash positions are followed by market speculators and adjusted based on the market outlook. Cash levels can typically be found in a holdings breakdown or they may also be disclosed as short-term reserves. In addition to cash, cash levels also include cash equivalents such as money market investments that can earn returns of around 2% while still providing the same liquidity as cash.

For investors, cash levels can signal a collective sense of fear or optimism about the broad markets. For instance, if 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 available cash is being put to work in the market.

There may also be other reasons that a fund chooses to hold higher levels of cash. Some funds may keep cash on hand for making optimal investments in new securities when new opportunities are presented. Other funds may 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 for various reasons.

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 develop a written liquidity risk management program. Part of this program requires that funds ensure they do not invest more than 15% of their net assets in illiquid investments.

Other changes and modifications affect 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 allow 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 easier for investors. As a result, the new regulations add requirements for liquidity risk management programs, illiquid positions and greater reporting of cash positions.