After a swift rise in share prices since early March, cash available with equity mutual funds has fallen below 7 per cent of assets under management, a level last seen during the market peak in January 2008.

Even till April end, eq­uity fund managers were ca­utious and held 14.35 per cent of their assets in cash. The scenario chang­ed after the Congress-led alliance won a comfortable majority in general elections boo­sti­ng investors’ co­nfidence in political stability in the country.

Between April 30 and Se­ptember 30, cash available with 297 open-ended equity schemes declined from Rs 14,637.18 crore to Rs 9,675.15 crore, data available from Delhi-based mutual fund tracking firm Value Research showed. During this period, cash as a percentage of total equity assets declined from 14.35 per cent to 6.25 per cent. (See chart)

“Markets are buoyant, so obviously we have to invest,” said Satish Ramna­than, head of equities at Su­ndaram BNP Paribas Asset Management.

The benchmark Sensex of the Bombay Stock Exchange (BSE) has gained 108.61 per cent in this year so far since closing at a three-year low of 8,160.40 on March 9.

The market rally has forced many fund managers to cut their high cash levels and chase the returns, said head of equities of a mutual fund house, who wished not to be identified. “The conviction in the market is because of momentum and not valuations,” he said.

The low level of cash among Indian equity mutual funds also gives some indication of present domestic sentiment, believes Jyotivardhan Jaipuria, head of research at foreign brokerage Bank of America (BoA) Merrill Lynch.

“These low levels of cash were last seen at the peak of the markets in January 2008. While insurance co­mpanies are bigger buyers than mutual funds, it does indicate that buying from domestics will be lower going forward,” he said in a strategy note to clients.

Most market experts are also of the view that valuations are now running ah­ead of fundamentals and the rally is largely driven by liquidity. “Valuations are ri­ch,” said Ramnathan of Su­ndaram BNP Paribas, who has a “neutral” stance on the market. At Wednesday’s close of 17,023.18, the 30-stock Sensex quoted at 19.89 times its expected earnings per share of Rs 856.04 for the financial year ending March 31, 2010, according to Bloo­mberg. This is higher than the ben­chmark’s long-term average price-to-earnings (P/­E) mu­ltiple of about 15 times.