Mutual Fund Liquidity Ratio

Mutual funds don't invest all their money fully at all times. Sometimes, a fund will sit on cash until an enticing investment comes along.

A high level of cash can indicate that a manager is unsure about the direction of the market. Also, it can provide a red flag for investors. After all, you're not going to get rich by having your money manager hold your cash in the bank. You want that money invested...that's the point of forking the dough over to a manager in the first place.

For those reasons, it's good to know how much cash a mutual fund is holding. The mutual fund liquidity ratio provides that info. "Liquid" = cash ready fast.

The figure consists of a ratio of the cash and cash equivalents (low-return investments that can easily be turned into cash) held by the fund, compared to the fund's total assets. Generally speaking, 3%-5% is considered typical. More than 5% might indicate a troubled market, at least in the opinion of the fund manager. (They're waiting to put their dough to work after a market bottom-drop.) Or it could indicate that that manager is a wuss, and you should find a fund with a more confident person in charge.