Equity funds showed net inflows for most months. However, the trend changed since Jul-20. In the months of July and August (chart above), the equity fund redemptions were more than the equity fund purchases resulting in net outflows from equity funds. These flows, to a large extent, determine how the equity funds plan their trades in equities. We must not forget that this is the net equity flows despite Rs7791cr of SIP inflows, predominantly into equity funds.
Mutual fund purchases and sales in Large Caps: Aug-20?
It sound paradoxical, but mutual funds heavily bought into frontline banks. The 2-year restructuring window meant that despite the withdrawal of EMI moratorium, Indian banks will not have to worry about expansion in gross NPAs for now. This resulted in frenzied buying in banks, which explains the 10% rally in Bank Nifty in Aug-20.
Mutual funds pumped in close to $1 billion across 8 major front line stocks, most of which were financials. MFs heavily bought into Axis Bank, HDFC, Bandhan Bank, and ICICI Bank. In all the cases, the valuations were very reasonable and Bandhan Bank offered a goldmine of liquidity in the form of promoter exiting his stake to comply with RBI stipulations. Apart from banks, mutual funds also bought into non-financials like Coal India, Reddy Labs, Infosys, Sun Pharma, TCS and Tech Mahindra. Clearly, there was a preference for the IT space, more as a defensive play in an, otherwise, market.
In large caps, mutual funds were heavy sellers in 3 stocks; Reliance Industries, Tata Consumer and Divi’s Laboratories. The decision to sell Reliance may sound perplexing but mutual funds did not have much choice as they were nearing their 10% limit. Same was the case with Tata Consumer and Divi’s Labs too. Additionally, mutual funds also booked profits in other stocks like Asian Paints, Adani Ports, Eicher Motors, HDFC Life, Kotak Bank, Titan and Tata Motors.
The left side of the chart are the large cap stocks that saw heavy buying in the month of Aug-20. The right side are the stocks that saw heavy selling during the month. On the buy side the major buys are almost entirely concentrated in the financial sector. The only exception is Infosys which saw aggressive buying in August after it reported strong numbers for the Jun-20 quarter. Infosys guidance was also very upbeat.
On the sell side, most of the selling was driven by mutual funds breaching the 10% limit, especially with stocks like RIL, Tata Consumers and Divi’s rallying so sharply since the lows of March 2020. These stocks have more than doubled in the last five months, leading to the valuation distortion in the funds. In the case of Vedanta, it was more of strategic profit booking by mutual funds ahead of the delisting proposal. That event had led to an aggressive rally in the stock and mutual funds were obviously making the best of the commodity rally.
What did mutual funds add and reduce in mid caps in Aug-20?
Let us first look at the stocks that saw buying from mutual funds and the stocks that saw selling. In the mid cap space, the stocks that saw the maximum buying from mutual funds were Alkem Labs, Apollo Hospitals, Cummins India, Gujarat State Petronet, M&M Financial, Mphasis, NALCO and Tata Power. Clearly, the healthcare opportunity appears to be an attractive proposition among mid caps even as companies like Tata Power that have embarked on debt reduction, were also in demand. Among the stocks sold were Aarti Industries, Adani Gas, Apollo Tyres, Exide Industries, Emami, Jubilant Food and Syngene. There was a clear attempt to take profits off the table in select cases like Aarti Industries, Exide, Jubilant and Syngene, which have seen a sharp rally in the last few months.
Fresh entries and full exits in mid cap stocks in Aug-20
Some of the mutual funds added fresh positions in certain stocks. For example, ITI MF bought into ADF Foods, Associated Breweries and FIEM Industries. SBI MF bought into Fairchem Organics while Sundaram entered Kovai Medical in Aug-20. HDFC MF added Technocraft to its portfolio while Edelweiss MF added the new listed Mindspace Business Park REIT to its portfolio.
There were also some notable exits. While HSBC MF fully exited Macpower CNC Machines, PGIM MF made an exit from NDR Auto Components. Among smaller quantity exits, Quant MF exited Novartis India while L&T MF got out of RSWM.
In a nutshell, Aug-20 was a month of very stock specific movements in and out of the portfolios of mutual funds. It remains to be seen how equity fund managers react if the net outflows in equity funds continue for a few more months. That could be the real test!