IPO activity slows, equity MF cash level falls: What does it mean for stock market

YES Securities in a strategy note said cash levels with equity mutual funds have declined to around 5 per cent, which on the surface suggested higher deployment into stocks. The domestic brokerage said a closer look showed that a disproportionate share of incremental flows had been absorbed by the primary market rather than the secondary market. The brokerage said this pointed to selective risk-taking, with fund managers preferring price discovery and structural growth opportunities through IPOs instead of chasing secondary market valuations.

That said, with IPO supply now slowing and systematic investment plan or SIP flows remaining strong, YES Securities said that the next phase of deployment appeared to be nearing an inflection point. Incremental flows could either be used to rebuild cash buffers or increasingly find their way into secondary equities, which could support markets in the coming months, the brokerage said.

MF cash levels  YES Securities said equity mutual MF cash holdings eased to around 5 per cent from FY25 and nine-month FY26 averages of about 5.2 per cent and 5.4 per cent respectively, indicating deployment. Despite this, mutual fund cash as a share of total market capitalisation remained elevated at 0.38 per cent compared with the three-year average of 0.32 per cent, signalling continued caution.

IPO market & incremental flows YES Securities said a large portion of recent mutual fund deployment had gone into IPOs, with allocations running well above historical averages on both a monthly basis and a twelve-month rolling basis. This, it said, challenged the view that the drawdown in cash reflected comfort with secondary market valuations.

Midcap schemes led activity Scheme-level data, YES Securities said, showed that midcap funds have been the primary drivers of IPO allocations, reflecting both higher IPO supply from this segment and stronger conviction in midcap growth narratives, the brokerage said.

Despite the overall decline in cash levels, YES Securities said flexi cap funds, which accounted for the largest assets under management, continued to hold disproportionately higher cash, positioning them as a potential shock absorber within the mutual fund ecosystem.

What is next? The brokerage said that with IPO issuance slowing sharply, SIP flows staying healthy and secondary markets under pressure, incremental flows could either rebuild cash buffers or increasingly move into secondary equities, which could support markets in the months ahead.