The record cash holding among mutual funds could be due to funds positioning themselves for sector rotation and market timing says Akhil Chaturvedi, Executive Director and Chief Business Officer of Motilal Oswal.

In a conversation with Benzinga India, Chaturvedi also spoke about the opportunities in the Alternative Investment Funds (AIF) and Portfolio Management Services (PMS). The growth in AIFs has been fueled by growth in high-net-worth investors and have performed well beating market indices during the bull market.

4 out of 6 Category II AIFs had outpaced Nifty returns in August. How is the AIF investment landscape shaping up in India and what are the challenges faced in the segment?

There is significant growth in the AIF across all three categories, which has been over 25% over the last 10 years. The overall size of the AIF is around $10 billion (around ₹83,966 crore) now, this is resultant of the growth of the high-net-worth individual (HNI)/ultra-high-net-worth individual (UHNI) category and favourable risk appetite amongst investors for alternate funds essentially category II which cater to private equity, real estate and fixed income asset classes.

Across all these funds the performances have been stellar with good underlying investments and current bull markets with favourable exits at good Internal rate of return (IRR). We feel that the growth trajectory will continue for AIF's in general with a booming economy and strong capital markets for new couple of years.  

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Are PMSes turning things around with returns beating the index when generally they tend to struggle to beat the index's return in the long term due to their high fees?

PMS's in general out perform in bull markets due to their sophisticated and focused strategies with strong growth themes. PMS's usually are built around high convictions by holding of limited number of stocks, the active ratio of the PMS's are also very high relative to the benchmark and therefore has shown strong performance, even after accounting for fees.

How do you view SEBI's new proposed asset class between Mutual Fund and PMS? 

We are still waiting for more clarity on the new structure, policies, and frameworks, as well as the tax treatment of alternate strategies. If the industry is permitted to develop PMS/AIF-like products with a mutual fund tax structure and the potential for leveraging, it could lead to significant growth and offer investors a very favourable investment structure. 

Few mutual funds have increased cash holdings to record high (Mutual funds had ₹1.86 lakh crore cash as of August which made up 5% of total AUM). Is this signs that DIIs are expecting market correction or the valuations are expensive?

It could be a mix of timing the market and some sectoral or stock rotation. We feel recently launched new fund offerings (NFOs), to the tune of $3 billion (around ₹25,189 crore) in the last quarter may also be contributing to the overall cash position being higher now.

What are your expectations for equity markets in Q2 After mixed performances in Q1?

We feel markets would consolidate here and this would be good from valuation perspective. There is a possibility of large caps to do better than small and mid caps for now, this also reflects with the new flows moving towards large cap oriented funds. 

What are the sectors which offer opportunities at current valuations?

We feel this market is more about picking individual stocks than sectors. Some of the themes that look interesting are NBFC's, Telecom, Manufacturing, new age digital businesses and luxury consumption.

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