Article: Domestic mutual funds trimmed cash holdings to a multi-year low of 4% in June, and foreign institutional investors (FIIs) pumped Rs 15,559 crore into Indian equities in July, creating a rare double-engine boost to market liquidity. The convergence of domestic capital deployment and fresh foreign money could set the stage for the next leg of the Indian equity rally.

Mutual funds shed cash

Data from ACE MF shows the equity cash ratio fell from 4.24% in May to 4% in June, while the absolute cash pile slipped to Rs 1,83,094 crore – the lowest level in 19 months. The decline follows a brief surge that saw cash peak at Rs 2.23 lakh crore (6.12% of equity AUM) in April. In other words, fund managers have redeployed more than 210 basis points of cash since the April high.

Large houses led the charge. SBI Mutual Fund cut its cash balance by Rs 3,830 crore, ending July with Rs 22,084 crore on hand. PPFAS Mutual Fund trimmed Rs 1,997 crore, Motilal Oswal Mutual Fund deployed roughly Rs 1,903 crore, and Parag Parikh Flexi-Cap Fund shaved Rs 3,405 crore over the last two months. The pattern signals a shift away from the “wait-and-watch” stance that dominated much of the past year.

FIIs end a four-month sell-off, pour in fresh funds

After four straight months of net selling that totalled Rs 2,60,925 crore, FIIs reversed direction in July, buying back Rs 15,559 crore of Indian stocks. Goldman Sachs analysts call the current foreign positioning “ultra-light,” implying ample room for additional inflows. The turnaround stems from a stabilising rupee, resilient domestic growth, lower commodity prices and upbeat expectations for second-quarter earnings.

The money is moving toward value-oriented segments

Fund managers are not buying indiscriminately. Axis Mutual Fund notes that while mid- and small-cap valuations have surged, large-cap stocks and certain cyclical sectors now offer better risk-reward profiles. The emerging focus is on:

  • Banking and financials – heavily sold in recent months, now viewed as reasonably priced.
  • Domestic consumption – consumer discretionary, autos and pharma, which benefit from a large, growing middle class.
  • Manufacturing-linked businesses – capital goods and firms with strong balance sheets, seen as the engine of a post-pandemic recovery.

The combined effect of domestic cash deployment and foreign buying creates a liquidity cushion that could sustain price appreciation over an 18- to 24-month horizon.

Risks and what to watch next

The liquidity boost does not erase downside risks. Geopolitical tensions and an unpredictable monsoon season could reignite volatility. If foreign investors flip into a “sell-the-news” mode after a short-term rally, the market could face a sudden reversal. Investors should monitor:

  • FII flow trends – a slowdown or fresh outflow would erode the foreign side of the liquidity engine.
  • Cash ratios of domestic funds – a rebound in cash holdings would signal a pause in domestic buying.
  • Sector earnings – especially in banking and manufacturing, where valuation shifts are already underway.

Takeaway

With mutual-fund cash ratios at a multi-year low and FIIs back in the market, Indian equities now have a dual source of fresh capital. The real test will be whether fund managers can turn this liquidity into sustained buying in value-oriented stocks without being derailed by external shocks.