Mutual funds have been net sellers on most days in Jan-21, except for the last few days when FPIs had turned net sellers and domestic funds supported the markets ahead of the Union Budget. However, the net outflow of Rs12,980cr in equities in Jan-21 only tells you part of the story.
The bigger story has been one of heavy churning in equities by mutual funds. That is obvious when you consider that domestic funds bought equities worth Rs71,774cr and sold equities worth Rs84,754cr. For investors, it is important to understand the stocks that mutual funds bought sold. But, first a quick perspective on the flows into equity funds from MF investors in last few months.
Mutual fund investors have been redeeming equity funds
The month of Jan-21 marked the seventh consecutive month of net redemptions in equity funds by MF investors. In the month of Jan-21, as per AMFI data, net redemptions in equity funds were to the tune of Rs9,253cr. That trend also got extrapolated to the aggressive balanced funds giving a picture of overall redemptions in equity funds at higher levels. Since July 2020, net redemptions from equity funds have been to the tune of Rs42,300cr and that has put pressure on the capacity of mutual funds to buy equities.
That is just part of the story! During the seven months since July 2020, over Rs60,000cr was infused into mutual funds via SIPs (predominantly equity and balanced funds). If you consider that the net redemptions have still been heavy during this period, it is due to lump-sum equity MF redemptions of more than Rs1 trillion. That has put pressure on MF flows into equities and resulted in net redemptions. But the churn story is a lot more interesting.
Key stocks sold by mutual funds in Jan-21
The sell list of mutual funds is not too surprising for two reasons. Most large caps have rallied and are trading close to their historic highs. Secondly, SEBI regulations do not permit any single fund to hold more than 10% of their portfolio exposure in a single stock. With funds already overexposed to large cap heavyweights, the 105% bull rally since March 2020 has compounded their holding problems.
When it comes to heavyweights like Reliance Industries, Infosys and TCS, there is not much of a surprise element. Most of the mutual funds were close to their limits on these stocks and with the sharp rally in these stocks, some profit booking was inevitable.
Bharti Airtel was a different ball game. Apart from the sharp rally, FPI limits on Bharti were increased leading to heavy demand from FPIs. Mutual funds were using the pent-up demand for the stock to exit profitably. The recent MSCI weight revision was supposed to result in heavy FPI buying in Bharti group and mutual funds obviously made the best of the demand spurt in this stock.
In case of stocks like Power Grid, Bandhan Bank and KNR Construction, the immediate reason was the perception among sell-side analysts that medium term positives were in the price. With uncertainties pertaining to the power sector and microfinance, mutual funds were strategically using higher levels to monetize positions.
Key stocks bought by mutual funds in Jan-21
The mutual fund buy list in Jan-21 presented an interesting picture. The churn story appears to be to exit the fully-priced stocks and get into sector-laggard stories. For example, Tech Mahindra and HCL Tech have been relatively low-profile movers compared to big guns like TCS and Infosys. Similarly, Axis Bank was bank that had a very sceptical rally. Most of the attention was focused on frontline banks like HDFC Bank, Kotak Bank and ICICI Bank. With Axis Bank getting its NPA act together, mutual funds sensed an opportunity in the stock.
IRFC was more of an IPO demand story that led to heavy buying in the stock. Mutual Funds have been looking for cash-rich state-owned companies with the potential to pay rich dividends. IRFC does fall into that category. HDFC was another stock that is fancied for its SOTP valuations. The holding company discount had overplayed giving MFs reason to accumulate HDFC.
Finally, there were two India stories in the buy list. While L&T represented the India investment story, Asian Paints represents the India consumption story. Between the two stocks, mutual funds perhaps hoped to catch the pulse of the robust India growth recovery that looks so likely in FY22.