Mutual funds that hold a modest amount of their portfolios in cash are more flexible than those that remain almost fully invested. When investors withdraw their money, fund managers with a sizeable amount of cash can return that money on demand without having to sell any investments. When managers want to become more fully invested, they can use their available cash to buy stocks, without selling any investments to free up money for a purchase.
Of course, sitting on a lot of cash is a disadvantage when stocks are rising. Investors will end up with smaller returns than if their fund had been fully invested. When stocks are falling, however, cash helps limit losses.
The proportion of stock fund portfolios kept in cash is now at a record low. Stock funds held an average 3.4 percent in cash as of June 30, the latest data available, according to the Investment Company Institute, an industry trade organization. That’s the lowest ever in ICI records dating to 1984. The year when stock funds had the biggest cash percentage was 1990, when the average was more than 11 percent.
Below are average annual cash holdings as a percentage of all stock fund assets since 2000.
Source: Investment Company Institute