The mutual fund cash position is the ratio of mutual funds\' cash to total asset
ID: 2614159 • Letter: T
Question
The mutual fund cash position is the ratio of mutual funds' cash to total assets. During uptrends, fund managers want to invest cash quickly because cash earns only the risk-free rate of return and thus decreases fund returns. During downtrends, fund cash balances increase overall fund returns. As a result, mutual fund cash positions tend to increase when the market is falling and decrease when the market is rising. Technical analysts typically view mutual fund cash as a contrarian indicator. When mutual funds accumulate cash, this represents future buying power in the market. A high mutual fund cash ratio therefore suggests market prices are likely to increase. On the other hand, when mutual funds' cash is low, they are already invested and market prices reflect their purchases.Explanation / Answer
Mutual fund cash position ratio refers to liquidity ratio of mutual funds. The higher this ratio is it means the mutual fund managers has lot of cash in hand or cash invested in highly liquid risk free return assets. Therefore during uptrend in the market the mutual fund managers would invest these ideal cash or the risk free return investments as these ideal cash would only give risk free rate of return which would decrease the fund returns. So they would invest these cash in the uptrend market to earn return more than the return earned on these ideal cash. So the interpretation is as these cash are earning lower return in risk free rate the funds return is decreasing to increase this return the managers would quickly invest the cash available in the uptrend market to increase the overall returns from the fund. Also during the downtrend the markets would give negative return and these money market instruments would give risk free rate of return which would be more than the market available return