Cash Holding and Performance Analysis of Mutual Funds: A Case of an Emerging Financial Market

Abstract

This study is about the determinants of cash holding and impact of cash holding on mutual funds’ performance. In addition, the study analyzes the impact of performance-related determinants of cash holding on funds’ performance. Panel data of ten years of 190 open-end mutual funds are analyzed through fixed effect regression technique. The risk-adjusted funds’ performance of cash based portfolios is computed through capital asset pricing model (CAPM) (1964), Fama and French (1993) and Carhart (1997) models. The results indicate that small size funds, high charging front-end load funds, high turnover ratio funds, high 12 month fund returns run up, high dividend paying funds and high redemption level funds hold more cash for precautionary purpose to avoid costs of cash short-falls. Further, monthly average raw returns and risk-adjusted performance of funds with the lowest raw and residual cash holding are found higher than the funds with the highest cash holding. An increase in cash is found to dilute performance. This is a pioneer study in a corporate environment with shallow capital market, reliance of businesses on bank credit, firms exposed to agency issues, wealth expropriations and existence of business groups with political linkages but with opportunities of investments due to expected favorable geo-sociopolitical situation. The study generates outcomes relevant for other similar economies.