The first thing you might think when you look at a PMS factsheet and see that 8–10% of the portfolio is sitting in cash is:
“I have given the money to invest. So why isn’t all of it invested?”
It is a perfectly reasonable question.
When you hand over money to a portfolio manager, the natural expectation is that the money should immediately be put to work. But investing is not simply about finding places to put money. It is about deciding where, when, and at what price that money should be deployed.
Cash is not an accidental leftover or a sign that we have stopped investing. A small cash position is part of the portfolio construction process. It gives us the flexibility to wait when valuations are unattractive and act when opportunities become more compelling.
So, Why Does a PMS Hold Cash?
1. Because a good business is not always a good investment at any price
At ithought, we do not buy a stock simply because we like the company.
We look at the quality of the business, its fundamentals, earnings potential, competitive position and, importantly, the price we are paying for it.
A business can be excellent and still be too expensive to buy today.
Imagine you have identified a business that you believe can compound earnings over many years. If the market is currently assigning a very high valuation to that business, buying it immediately may leave very little room for error.
In such situations, waiting is also a decision.
We continue to track the business, assess whether our investment thesis is playing out and wait for a valuation that makes the risk-reward more attractive.
The same principle applies to existing holdings. We continuously reassess what a business is worth rather than assuming that because we already own it, we should automatically keep adding to it.
The business matters. The price matters. Both have to make sense.
Must Read: Portfolio Diversification vs Concentration: Finding the Right Balance
2. New money should not automatically mean new purchases
This becomes particularly relevant when fresh money enters a PMS.
Suppose the portfolio receives a new inflow today. There may not necessarily be enough attractive opportunities available on that particular day to deploy the entire amount.
Putting money into a stock simply because cash has arrived reverses the process.
Instead, we prefer to ask: Which businesses currently offer an attractive opportunity? At what valuation? How much should we own?
If the answer is not clear, there is nothing wrong with waiting.
The objective is not to maximise the percentage of money invested on day one. The objective is to deploy capital thoughtfully over the investment horizon.
3. Markets can change faster than our convictions
Markets do not move in a straight line.
A geopolitical event, regulatory change, unexpected economic development or a sudden shift in investor sentiment can change valuations very quickly. The Hormuz crisis is one example of how an external event can alter market expectations and create sharp movements across sectors and businesses.
We cannot predict when such events will happen.
What we can do is maintain enough flexibility to respond when they do.
When markets become more attractive, having some liquidity available means we can act without necessarily having to sell another holding first.
This does not mean we are sitting in anticipation of a market crash.
It simply means we recognise that markets occasionally present opportunities that were not available a few weeks—or even a few days—earlier.
4. Cash gives us the ability to build positions gradually
Investing is rarely an all-or-nothing decision.
When we identify a new opportunity, we may begin with a smaller position and increase it as our conviction builds and the valuation becomes more attractive.
This approach allows us to observe how the business performs, how our thesis develops and how the market prices the opportunity.
Similarly, if an existing holding becomes more attractive because of a correction in its price, available liquidity can allow us to increase our exposure.
Cash therefore gives the portfolio optionality.
It allows us to say, “Not yet,” when an opportunity is not attractive enough—and “Now,” when the opportunity becomes compelling.
A cash position does not necessarily mean we are bearish on the market. It simply gives the portfolio some flexibility when the opportunity set changes.
During a market correction, good businesses can sometimes become available at more attractive valuations. Having some liquidity allows us to add to existing positions or initiate new ones without having to first sell something else. If the portfolio were fully invested, every new opportunity would require answering another question: Which stock should be sold, and is the new opportunity genuinely better than what we already own?
At the same time, not every correction is a buying opportunity, and we do not hold cash waiting for the market to fall.
We remain invested in businesses that meet our investment criteria while keeping a relatively small cash buffer. The purpose is not to predict the market, but to have the flexibility to act when the right opportunity presents itself.
The Bottom Line: Invest With Purpose
A PMS portfolio is not a checklist where every rupee has to be invested immediately.
Every day, decisions are being made about whether to buy, add, hold, reduce or sell a stock. Sometimes the right decision is to act. Sometimes it is to wait.
And waiting does not necessarily mean doing nothing.
It can mean continuing to study a business, reassessing its earnings, monitoring developments, watching the valuation and waiting for the price to offer a better margin of safety.
So, the next time you see a cash allocation in a PMS factsheet, instead of asking only:
“Why isn’t this money invested?”
consider asking:
“What is the manager waiting for, and what opportunity is the cash keeping open?”
Our approach is to remain invested while keeping a small degree of flexibility. We do not try to predict every market correction, nor do we believe in holding large amounts of cash waiting for one. We would rather allow the portfolio to participate in the market while keeping enough liquidity to respond when the right opportunity comes along.
Because investing well is not always about moving faster.
Sometimes, it is about having the discipline to wait until the price, the business and the opportunity come together.
