Stocks mutual funds churned in Feb-21 and where are they overweight?

Let's take a quick view as to what forced mutual funds in India consistently sell in the equity markets.

March 15, 2021 7:08 IST | India Infoline News Service
It is no secret that equity funds have been selling heavily in stocks in the month of Feb-21. Most funds find themselves in a catch-22 situation. The equity fund investors, especially the lump-sum investors, are looking for greener pastures. That has forced mutual funds in India consistently sell in the equity markets. Here is a quick view.

Equity fund redemptions trigger selling by MFs

Data Source: AMFI / NSDL
The trend from the above chart is quite evident. Mutual funds have been selling in the equity markets even as FPIs have been buying. Of course, one reason for the selling is the profit booking at higher levels, which is something most mutual funds tend to do because they do not have the leeway to short markets the way FPIs do. Another reason is that mutual funds have an upper limit of 10% exposure to a single stock and that is why you will find selling in heavyweights at higher levels.

But the one factor driving MF selling in equities has been the consistent redemptions. In the last 8 months between Jul-20 and Feb-21, investors have been net redeemers in mutual funds in all the months and Mutual Funds have been sellers in equities in each of these eight months. Investors net redeemed equity funds worth Rs46,790cr but that was largely mitigated by the SIP flows of Rs62,400cr in these 8 months. Had it not been for these SIP flows, the actual lump-sum selling in equity funds was to the tune of almost Rs110,000cr. That explains why equity funds sold stocks to the tune of Rs119,314cr in the last 8 months.

Equity funds sold heavily into large caps in Feb-21

For mutual funds, it was once again the Sutton’s Law at work. Willie Sutton was a famous American bank robber in the early part of the 20th century. When he was finally caught and asked why he always robbed banks, his response was “That is where the money is”. Over time Sutton’s Law has become a standard principle in business and other fields.

In the case of mutual funds, why did they sell in large cap heavyweights. The answer, “that is where the profits were”. In the last one-year, heavyweights have not only rallied sharply but they are liquid enough to give an easy exit for mutual funds. Just check the chart below.

Data Source: ACE MF
To be fair, equity funds were not just sellers but they also bought stocks like NTPC, IndusInd Bank and L&T in Feb-21. MFs were looking to tweak their holdings as we shall see in detail in our sectoral weight analysis of major fund houses. In the month of Feb-21, mutual funds were also select buyers in mid cap and small cap stocks. For example, they added on to their positions in stocks like SAIL and Jindal Steel on hopes of continued recovery in steel.

Most mutual funds also bought into the Indian Railways investment proxies via IRCTC and RailTel. Of course, most mutual funds were also adventurous enough to bet on a recovery in PVR as things return to normal. It is a guess; how these stories will actually pan out.

Where are mutual funds are overweight / underweight?

How do you define whether mutual funds are overweight or underweight a particular sector? A simple way is to gauge the exposure of the fund to a particular sector and compare with the weight in a broad-based index. If the fund has assigned more weight to a sector than the index it is overweight; else it is underweight.

Here we look at 7 important sectors on the stock exchanges that account for over 85% of the index weightage. Since Nifty and Sensex are too narrow to get a proper industry spread, we have considered the broad-based Nifty-200 index. For maintaining materiality of the comparisons, we have only compared the top-3 fund houses by AUM to judge whether exposures to a sector are underweight or overweight.

Sector Nifty-200 Weight SBI MF HDFC MF ICICI Pru MF
Automobiles 5.95% Overweight Overweight Equal Weight
Banking & Finance 35.37% Underweight Underweight Underweight
Capital Goods 3.87% Overweight Overweight Overweight
Cement 3.19% Overweight Underweight Overweight
FMCG 13.31% Overweight Equal Weight Underweight
Information Tech 13.09% Underweight Underweight Underweight
Oil & Gas 10.89% Underweight Underweight Underweight
Data Source: Fund Factsheets / NSE

The top-3 fund houses account for 40% of the MF segment AUM as a whole so their positions are fairly representative. Three important points emerge.
  • There seems to be a consensus on being underweight on heavy sectors like banking, IT and hydrocarbons due to valuation concerns and crude price volatility.
  • There is also a clear focus on sectors like capital goods and cement which could be solid proxies for the macroeconomic recovery in FY22.
  • The opinion is more scattered in the case of autos and FMCG, where there are valuation concerns but are also attractive being proxies for consumption.

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