Uninvested cash is cash that the mutual fund has not yet invested in securities. High levels of uninvested cash are drags on a mutual fund’s performance. This means that if the fund’s portfolio has a small percentage of large-capitalization stocks and a large percentage of cash, the low rate of return on the cash will dilute the higher rate of return on the large-capitalization stocks. Look for funds that keep the percentage of cash in their portfolios low. Some mutual funds hold large amounts of cash to fund potential redemptions or to comply with their investment policy. Choose funds that are fully invested (95 to 99 percent, depending on the asset class and fund size) in the market segment that you are targeting. Do not pay the mutual fund to manage cash. While it is acceptable for open-end mutual funds to have some frictional cash, this cash should still comprise less than 5 percent of the fund.

The percentage of uninvested cash in a fund is listed in the “Asset Allocation” section of the prospectus (see Table 25.4). Remember that the amount of uninvested cash in a fund may change over time, so monitor this amount. The Vanguard fund has 0.4 percent uninvested cash.

Table 25.4
Morningstar Website: Uninvested Cash