Mumbai: India’s world-beating stock-market rally is prompting money managers to play it safer.

Cash levels at equity mutual funds climbed to an average of 6 per cent of assets for the March quarter, according to data from Morningstar Investment Adviser India Pvt. That’s the biggest proportion since 2012.

Equity funds are reacting to a side-effect of the S&P BSE Sensex index’s 10 per cent gain this year: concerns that stocks are overpriced. Valuations at the end of March were at the highest level since 2010 amid bets that a state election victory will embolden Prime Minister Narendra Modi to push ahead with his reform agenda.

“Fund managers are being cautious as valuations are looking stretched,” Taher Badshah, chief investment officer of equities at Invesco Asset Management (India) Pvt. in Mumbai, said by phone. “The cash buffer will give them the ammunition to take advantage of any correction in the market.”

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Rich valuations was one of challenges faced by BlackRock Inc.’s Indian unit, which in February shut its DSP BlackRock Micro Cap Fund to new investors. The S&P BSE MidCap Index has surged 20 per cent this year, while the Sensex is the best-performing equity benchmark so far this year among the world’s 10 biggest stock markets.

“Funds are taking a more selective approach, weighed by high valuations especially in mid and small-cap stocks,” Kaustubh Belapurkar, director of fund research at Morningstar, said by phone. “Managers are finding it tough to allocate money amid a gush of inflows.”

Retail Growth

Individual investors have been a force behind mutual funds’ growing heft since Modi took office in May 2014.

Although the cash hoard as a proportion of assets has grown, it is less than the average 13 per cent funds held during the global financial crisis in 2008, according to Morningstar. The reading peaked at 20 per cent in February 2009, the data show.

The Sensex has set fresh records this year, the last one on April 5. The two per cent decline since then may not last long, according to Invesco Asset’s Badshah said. The gauge rose 0.3 per cent at the close in Mumbai. The mid-cap index rose 0.7 per cent to a record.

“High cash levels also means that market declines will be short lived,” said Badshah, whose firm has 3 per cent of its $619 million assets in cash.