A mutual fund liquidity ratio is a ratio that compares the amount of cash in a fund relative to its total assets. Mutual fund liquidity ratios can vary and may include cash or all cash and cash equivalents.


An Introduction To Mutual Funds

Breaking Down Mutual Fund Liquidity Ratio

A mutual fund liquidity ratio is reported by mutual funds to provide investors with insight on how much cash the fund is holding. Companies may report cash ratios or cash and cash equivalent ratios, which is a broader measure encompassing cash equivalents that can be easily liquidated within a short period of time. The ratio is a simple percentage dividing either the total cash or the total cash and cash equivalents by the fund’s total assets.

Mutual fund cash levels are also followed closely by industry speculators as an indication of the market’s direction. Most funds keep approximately 3% to 5% of their total assets in cash.

Industry Speculation

The Investment Company Institute provides a monthly report on mutual fund industry statistics, which includes information on the mutual fund industry’s average mutual fund liquidity ratio. In October 2020, the Investment Company Institute reported a liquidity ratio across equity mutual funds of 2.1%.

Generally, investors may follow mutual fund industry liquidity to get a sense of money managers’ collective perspective on the market. Liquidity ratios greater than 5% are expected to show some fear in the market’s prospects for gains with a bearish outlook. Liquidity ratios below 5% tend to show that money managers are more bullish on the markets and fully deploying all cash.

Mutual Fund Cash Regulations

Until 2016, mutual fund cash levels and mutual fund liquidity were not factors that were highly regulated. However, in 2016 the Securities and Exchange Commission (SEC) issued some new rules pertaining to mutual fund liquidity management. The agency’s new rules went into effect in December 2018, adding some new provisions to the Investment Company Act of 1940. Changes are primarily focused around Rule 22e-4, which requires funds to document a comprehensive liquidity program and invest no more than 15% of their net assets in illiquid investments. Other changes include amendments to mutual fund registration Form N-1A as well as changes to Form N-LIQUID, Form N-CEN, and Form N-PORT. With the new rules, the SEC is seeking to help investors more easily buy and redeem shares while also instituting some new parameters for liquidity risk management and cash position reporting.