A question that I was recently asked with regards to investing in equity mutual funds was whether a fund should be fully invested in equity at all times or should it be holding cash if need be?
There were two arguments against a stay in cash strategy.
One, holding cash can lead to underperformance as the markets may rally faster than the funds can search for opportunities and deploy the cash.
Two, how can a fund hold cash and charge a Fund Management fees of 1% to 2% or more? The investor pays fund management fee to make investment in equities, not for holding cash.
Let’s see if these arguments hold any water.