Mutual Fund Liquidity Ratio

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DEFINITION of 'Mutual Fund Liquidity Ratio'

A ratio published monthly by the Investment Company Institute that compares the amount of cash relative to total assets held by a mutual fund. Equity investors use the mutual fund liquidity ratio to gauge the demand for shares and the bullishness or bearishness of portfolio managers.

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BREAKING DOWN 'Mutual Fund Liquidity Ratio'

For example, if a mutual fund is sitting on a large amount of cash, the theory is that it is doing so because it is hard pressed to find quality investment opportunities; therefore, it has a bearish sentiment toward the market. Conversely, if a mutual fund is highly invested and has a very small amount of cash on hand, the theory is that it has found some excellent investing opportunities and is taking advantage of these opportunities by being nearly fully invested - that is to say, it is bullish.

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