According to the folks at Strategic Insight, in the first two months of the year, open-ended mutual funds enjoyed net cash inflows. That means billions of dollars more went into them than was withdrawn out of them. That hasn't been the case for mutual funds in general. Massive outflows from funds as a whole have even contributed to the market's downturn, as redemption requests force fund managers to sell holdings to generate the cash to pay off departing shareholders, and those sales drive down stock prices.

So more money in funds is good, right? Well, sure, money in mutual funds can help fuel people's retirement and other needs. But in some funds, much of the cash that the fund has taken in remains in cash. I see an upside and downside to this.

The good and the bad
There are certainly times when it can seem smart to have a big chunk of your nest egg in cash. If, for example, the market seems severely overvalued, you might want to wait for a bubble to burst, so that you can snap up shares of attractive companies at more attractive prices. (To many people, right now is a promising time to buy.)

But on the other hand, most of the time the market isn't grossly overvalued, and there are bargains to be found. Also, it's simply not possible to consistently time the market, buying and selling at the perfect moments. Even when the market zigs, your individual stocks may zag. For instance, witness how these big gainers fared in 2008, a year when the overall market plunged by nearly 40%:


2008 Return

Wal-Mart (NYSE:WMT)


Hasbro (NYSE:HAS)


H&R Block (NYSE:HRB)


Family Dollar (NYSE:FDO)




Sequenom (NASDAQ:SQNM)




Source: Yahoo! Finance.

What to do
So as you check up on your mutual fund holdings and potential holdings, be sure to glance at their cash levels. If the cash level seems reasonable, and you respect the fund's management and track record, all might be OK. The Fairholme (FAIRX) fund, for example, recently had 10% of its assets in cash, but it also sports a strong track record, so I'd give it the benefit of the doubt.

Most importantly, remember that if a fund is keeping lots of your assets in cash, you could do the same yourself -- and you probably wouldn't charge yourself an annual fee.

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Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart and Amgen. Wal-Mart is a Motley Fool Inside Value recommendation. Hasbro is a Motley Fool Stock Advisor selection. Fairholme is a Motley Fool Champion Funds pick. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.