Mutual funds don't invest all their money fully at all times. Sometimes, a fund will sit on cash until an enticing investment comes along.
A high level of cash can indicate that a manager is unsure about the direction of the market. Also, it can provide a red flag for investors. After all, you're not going to get rich by having your money manager hold your cash in the bank. You want that money invested...that's the point of forking the dough over to a manager in the first place.
For those reasons, it's good to know how much cash a mutual fund is holding. The mutual fund liquidity ratio provides that info. "Liquid" = cash ready fast.
The figure consists of a ratio of the cash and cash equivalents (low-return investments that can easily be turned into cash) held by the fund, compared to the fund's total assets. Generally speaking, 3%-5% is considered typical. More than 5% might indicate a troubled market, at least in the opinion of the fund manager. (They're waiting to put their dough to work after a market bottom-drop.) Or it could indicate that that manager is a wuss, and you should find a fund with a more confident person in charge.
Related or Semi-related Video
Finance: What is Capital Appreciation (M...10411 Views
Finance a la shmoop what is capital appreciation as in the sense of an
investment fund or a mutual fund you know that is like what does it mean to
have a mutual fund with a focus on capital appreciation all right people
think more, more assets all right you have capital and yes you [Woman with a vault full of money]
appreciate having that capital but you'd appreciate it more if there was more of
it like it appreciated so a capital appreciation fund is one which focuses
on just growing the assets bigger and bigger don't really care how the capital
gets grown don't necessarily need dividends don't necessarily need minimum
p/e ratios don't necessarily need balance sheet covenants on the
investments you make don't care if it's exposed to the Venezuelan oil companies [Venezuela city landscape]
or the Australian dollar in a cap app fund well you just want the dough to [Money falls into flower pot]
grow and this ethos is in contrast to other flavors of funds which for example
need to throw off cash in the form of dividends like in a growth and income
fund or interest like in a bond fund like you know it's cash people need to
live on right so those have to do a capital appreciation does not so what's
a typical investment in a capital appreciation fund well usually be
something like a mega trend tech stock that just grows or appreciates with time [Man typing on laptop]
and really doesn't throw off much if any of a dividend like Amazon, Netflix
Facebook, Google those guys so think of a capital appreciation fund is the body [Man wearing underpants in a locker room]
builder of the mutual fund world it just wants to grow everywhere
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