How MFs churned large caps, mid-caps, and small caps in October 2023

21 Nov 2023 , 09:20 AM

The month of October 2023 was the second consecutive month of FPI selling after September 2023. However, the FPI selling in October was close to $3 billion, compared to $1.50 billion in September 2023. To sum it up, FPIs have sold $4.50 billion of equities in the months of September and October 2023 combined. That is not a very big worry, either in the perspective of the past flows or in the light of the strong domestic inflows. Let us look at both these aspects separately. Despite the heavy selling by FPIs in September and October, the impact on the markets was limited. 

That is because, domestic mutual fund and LIC continued to play a key role in ensuring that flows into equity market sustained even in the absence of FPI buying. Remember, between the LIC and the domestic mutual funds, they manage close to $1 trillion in funds. That is a lot of money to offer meaningful support to the markets, should the FPI selling intensify. In addition, the mutual funds saw strong interest from retail, if you look at the NFO collections and the steadily growing gross SIP collections each month. Here we look at what is happening behind the flows into equity markets. We delve deeper into the kind of churn that equity funds are doing and how it is having a stock-specific impact on large cap, mid-cap, and small cap stocks.

October 2023 saw robust gross churn and record SIP flows

One can say that NFO flows were relatively tepid in the month of October 2023 at Rs3,638 crore, and that is nearly half of the NFO flows in September 2023. Buik of the flows of NFOs went into small cap and multi-cap funds during the month of October, but the contribution was not too significant. The bigger story was on SIP flows or the flows coming into mutual funds from systematic investment plans of mutual funds. While SIPs pertain to all categories of fund classes and investor classes, they are predominated by retail investors and by flows into equity or equity related funds. SIP flows scaled an all-time high of Rs16,928 crore in October 2023, the first time it has scaled such a high level in a month. However, these are gross SIP flows and the net SIP flows would be lower as they will get adjusted for redemptions and non-renewal of SIPs. While SIP flows are spread across different categories of mutual funds, past data shows that nearly 80% of the SIP flows gravitate towards equity funds. So, even without FPI flows, the SIPs were a big contributor to equity churn in October 2023. But the bigger story is about gross churn by the equity mutual funds.

Why has there been persistent churn in equities by mutual funds. That is directly linked to the flows that come into equity funds. Now, this is not just about the net inflows into equity funds but the gross flows and the gross redemptions, which jointly decide the overall flows into and out of equity stocks. Let us look at the numbers! The net flows of Rs19,957 crore into equity funds in October 2023 is surely attractive and also higher than September 2023. However, that is not the most relevant thing for mutual fund churn. This net inflow of Rs19,957 crore into equity funds was driven by Rs43,805 crore of gross equity fund inflows and Rs23,848 crore of gross MF redemptions. In short, it is this overall gross flows of equity funds to the tune of Rs67,653 crore that actually deciders how the equity stocks are churned by the mutual funds in the month. What we have spoken about till now are the active equity funds. For now, we are not even counting the implied equity holdings in hybrid funds and passive index funds and index ETFs. If you add that, the number could be bigger.

That brings us to the million dollar question; if the mutual fund churn was so aggressive, with gross churn of more than Rs67,753 crore, what were the specific stocks that the mutual fund bought and what are the stocks that they sold in the month of October 2023. Flows into equity funds have a multiplier effect on mutual fund churn as fund managers also use higher levels of the index to restructure fund portfolios. Here is the granular picture of mutual fund portfolio churn, based on market capitalization of stocks as we look at large caps, mid-caps, and small caps as distinct clusters to understand the pattern of flows.

Large cap stocks: How MFs churned in October 2023

For simplicity, we will stick to the well-accepted AMFI definition based on market cap rankings to delineate large cap, mid cap, and small cap stocks. As per the AMFI methodology, the combined universe of listed stocks on NSE and BSE are first and foremost ranked descending on market capitalization. Then the price of the stock exchange is selected for consideration based on higher volumes. From this list, the top-100 stocks by market capitalization are classified as large cap stocks. This list is reviewed by AMFI on a half yearly basis to ensure definitions are as current as possible and this is the dynamic definition that we shall also use here. Here are the major large cap stocks that Indian mutual funds bought and sold in the month of October 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 188 lakh shares of Hindalco Ltd, 94 lakh shares of Dabur India Ltd, 91 lakh shares of Tech Mahindra Ltd, 41 lakh shares of IRCTC Ltd, 40 lakh shares of Adani Power Ltd, 34 lakh shares of Interglobe Aviation Ltd (Indigo Airways), 17 lakh shares of Bajaj Auto Ltd and 16 lakh shares of Hero Motocorp Ltd. In addition, mutual funds also added 14 lakh shares of Adani Enterprises Ltd; and smaller quantities of Havells India Ltd in the month of October 2023. Interestingly, there seems to be a lot of interest among mutual funds in buying auto stocks, while the mutual funds are generally appearing to be sector agnostic otherwise.

We now turn to major large cap selling by mutual funds in October 2023. The selling was prominent in the stocks that had rallied sharply in the recent past, but it must be said that in the month of October the mutual fund selling in large caps was relatively subdued. Let us look at the major sell candidates. There was heavy selling of 331 lakh shares in Punjab National Bank (PNB), 247 lakh shares in Oil & Natural Gas Corporation Ltd (ONGC) and 98 lakh shares of Bank of Baroda. These were the major sell candidates. In addition, a total of 17 lakh shares of Torrent Pharmaceuticals Ltd, 13 lakh shares of Godrej Consumer Products Ltd, 8 lakh shares of Vedanta Ltd, and 7 lakh shares of Varun Beverages Ltd (VBL) were also sold by the mutual funds among large caps in October 2023. Apart from these, mutual funds also sold smaller quantities of ABB India, Tube Investments, and Eicher Motors in the month of October 2023.

Mid-cap stocks: How MFs churned in October 2023

Let us quickly get into the AMFI methodology to classify a stock as mid-cap? Under the AMFI definition, once the top 100 stocks by market cap are classified as large cap stocks as explained in the previous para, the 101st to 250th ranked stocks by market cap would qualify as the mid-caps. Here are the mid-cap stocks that mutual funds bought and sold in the month of October 2023, showing the churn on both sides.

Let us first focus on mid-cap buying in October 2023. Overall, mutual funds added 2,654 lakh shares of Vodafone Idea Ltd, 126 lakh shares of L&T Finance Holdings Ltd, 82 lakh shares of Aurobindo Pharma Ltd, 61 lakh shares of Syngene Ltd, 51 lakh shares of PB Fintech (Paisabazaar), 33 lakh shares of One97 Communications Ltd (Paytm), 15 lakh shares of JSW Energy Ltd, and 10 lakh shares of Dixon Technologies (India) Ltd. In addition, the mutual funds also bought smaller quantities of shares in companies like General Insurance Corporation of India (GIC), and CRISIL Ltd in October 2023. The buying was most prominent in the digital stocks and many were part of the block selling by PE funds. 

We now turn to major mid-cap selling candidates during the month of October 2023. Mutual Funds sold 355 lakh shares of Steel Authority of India Ltd (SAIL), 195 lakh shares of Bandhan Bank, 91 lakh shares of Indian Railway Finance Corporation Ltd (IRFC), 33 lakh shares of Gujarat Gas Ltd, 29 lakh shares of Bank of Maharashtra, 21 lakh shares of Aarti Industries Ltd, 13 lakh share of Indian Overseas Bank (IOB), and 10 lakh shares of Tata Chemicals Ltd. In addition, the month also smaller quantities of selling in UCO Bank and Central Bank. Across the large caps and the mid-caps, there has been aggressive selling in the PSU banking space, where the rapid growth in net interest income (NII) and the expansion of the net interest margins (NIMs) in recent quarters is expected to peak out. That was evident in the aggressive selling by mutual funds in the PSU banking stocks.

Small cap stocks: How MFs churned in October 2023

We now turn to the small cap stocks. In a sense, after understanding what are the large cap and mid-cap stocks; the residual list belongs to small cap stocks. Their technical definition for the purpose of the churn analysis is again adhering to the SEBI definition. On market cap ranking, the stocks ranked 251st and lower are classified as small cap stocks by AMFI. Here is a quick snapshot of key small cap stocks where mutual funds were active in October 2023; both on the buy and sell side. Micro caps are normally excluded from this list of stocks.

In October 2023, mutual funds added 71 lakh shares of Karnataka Bank Ltd, 58 lakh shares of Nazara Technologies Ltd, 48 lakh shares of Laxmi Organic Industries Ltd, 42 lakh shares of Sequent Scientific Ltd, 36 lakh shares of Shipping Corporation of India (SCI), 30 lakh shares of Swan Energy Ltd, 15 lakh shares of Mahanagar Gas Ltd (MGL) and 12 lakh shares of VA Tech Wabag Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like TVS Srichakra and Bharat Bijlee Ltd in the month of October 2023. Small cap buying, as always, has been largely bottom-up and stock specific with no sectoral trends.

Let us conclude our churn analysis with the small-cap selling in the month of October 2023. Mutual funds sold 1,359 lakh shares of Suzlon Energy Ltd, 49 lakh shares of Phillips Carbon Black Ltd (PCBL), 45 lakh shares of Orient Paper and Industries Ltd, 37 lakh shares of Ujjivan Small Finance Bank Ltd, 23 lakh shares of LT Foods Ltd, and 19 lakh shares of ITD Cementation Ltd during the month of October 2023. In addition, mutual funds entirely exited their holding of 85 lakh shares in Alembic Ltd during the month. In addition, the month of October 2023 also saw mutual funds selling smaller quantities in small cap stocks like Neuland Laboratories, Lux Industries Ltd and Uniparts India Ltd.

Finally, here are some key takeaways from the buying and selling data of mutual funds in the month of October 2023. The churn appears to be a case of funds taking profits out of the stocks that have rallied sharply and reallocating to the beaten down stocks. That is a logical move. While some of the moves have been sector-agnostic, some sectoral trends are also visible. Mutual funds have been getting out of PSU banks while they have been buying into new age digital stocks. In the last few months, the Nifty and Sensex have bounced sharply from lower levels, although the peaks are still some time away. The volatility in the market has given fund managers the opportunity to churn their portfolio and right size it. That was amply in evidence in October 2023.