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

14 Sep 2023 , 10:32 AM

Unlike May, June and July, the month of August 2023 did not exactly belong to the foreign portfolio investors (FPIs). Just to recap, the FPIs had infused close to $17 billion into Indian equities between the months of May and July 2023. However, the net FPI flows into Indian equites fell sharply to just about $1.48 billion in August 2023. In such a scenario, the gap was once again filled by the domestic mutual funds and LIC, India’s largest institutional investor with an AUM that is equal to the entire Indian mutual fund industry. However, the other big story of August 2023 was that SIPs and NFOs continued to play a major role in driving flows into equities.

August 2023 story of SIP flows and equity NFOs

One can say that NFO flows were surely better in the month of August 2023 at Rs7,343 crore. More importantly, over 70% of these flows were into equity funds, so they had a meaningful impact on the equity fund AUM for the month. The bigger story was on Sip flows or the flows coming into mutual funds from systematic investment plans of mutual funds. Now SIP flows had scaled to Rs15,245 crore in July and in August 2023, the SIP flows touched an all-time record of Rs15,814 crore. While the SIP flows are spread across different categories of mutual funds, past data shows that nearly 80% of the SIP flows tend to gravitate towards equity funds as per the SEBI classification. The moral of the story is that the mutual funds had enough of net cash ammunition to invest in the equity markets. 

However, that was not the real story. The real story was about the persistent churn in equities that mutual fund had to do because of the churn in equity fund flows. Here is what it means! The net flows of Rs20,245 crore into equity funds in August 2023 is surely attractive as it is nearly thrice the flow figure for July 2023. However, that is not the most relevant thing for mutual fund churn. This net inflow of Rs20,245 crore into equity funds was driven by Rs44,823 crore of gross equity fund inflows and Rs24,578 crore of gross MF redemptions. When you are up against that volume of inflows and outflows of close to Rs70,000 crore you can be dead sure that equity churn by the mutual funds is almost inevitable. This is just the active equity funds and we are not even counting the implied equity holdings in hybrid funds as well as passive index funds and index ETFs. 

With gross SIP flows at Rs15,814 crore, marking the highest flows ever, the flows continued to be robust and lower SIP closure also meant more by way of net SIP flows. Also, the month promised a high level of retail participation as evidenced by a sharp accretion in the number of SIP folios and the AUM of SIP holdings, both of which now stand at record levels. AUM is a combination of flows and accretion in market value, and most of the AUM growth this time around came from actual flows and not from market appreciation, due to August 2023 being a tepid month for the markets. That brings us to the million dollar question; if the mutual fund churn was so aggressive, then what are the stocks that the mutual fund bought and what are the stocks that they sold in August 2023. Remember, 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 we look at a granular picture of mutual fund portfolio churn, based on market capitalization of stocks. That is; we look at large caps, mid-caps, and small caps as distinct clusters.

Large cap stocks churned by mutual funds in August 2023

How exactly do we define large caps? For simplicity, we will stick to the standard AMFI definition based on market cap rankings. As per the AMFI methodology, firstly the combined universe of listed stocks on NSE and BSE are ranked descending based on market capitalization, with the exchange selected for consideration based on the 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 up to date. Here are major large cap stocks mutual funds bought and sold in the month of August 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 879 lakh shares of Zomato Ltd, 150 lakh shares of Tata Power Ltd, 121 lakh shares of Dabur India Ltd, 108 lakh shares of Vedanta Ltd and 97 lakh shares of Interglobe Aviation Ltd (Indigo Airways). In addition, mutual funds also added 49 lakh shares of UPL Ltd, 44 lakh shares each of Adani Power Ltd, 19 lakh shares of Britannia Industries and 8 lakh shares of Indian Railway Catering and Tourism Corporation Ltd (IRCTC). Apart from the above, mutual funds added smaller quantities of Adani Energy Solutions Ltd too in the month of August 2023. Interestingly, there seems to be a lot of interest among mutual funds in buying power stocks, especially the ones with a visible foray into green power.

We now turn to major large cap selling by mutual funds in August 2023. The selling was prominent in the stocks that had rallied sharply in the recent past, especially some specific stories like IOCL and Tata Consumer Products Ltd. Let us look at the major sell candidates. There was heavy selling of 233 lakh shares in Indian Oil Corporation Ltd (IOCL). In addition, a total of 28 lakh shares of Marico Ltd, 26 lakh shares of Tata Consumer Products Ltd, 20 lakh shares of Trent ltd, 17 lakh shares of Pidilite Industries, 14 lakh shares of Tube Investments and 10 lakh shares of Siemens Ltd. Apart from these, mutual funds also sold smaller quantities of Torrent Pharma, Berger Paints and Dr Reddy’s Laboratories (DRL) during the month of August 2023.

Mid-cap stocks churned by mutual funds in August 2023

Let us quickly get into the AMFI methodology to classify a stock as mid-caps? Under the AMFI definition, once the top 100 stocks by market cap are classified as large cap stocks, 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 August 2023.

Let us first focus on mid-cap buying in August 2023. Overall, mutual funds added 726 lakh shares of Union Bank of India, 248 lakh shares of FSN E-Commerce Ventures Ltd (Nykaa), 97 lakh shares of Aditya Birla Capital, 91 lakh shares of Coforge Ltd, 56 lakh shares of Petronet LNG Ltd, 40 lakh shares of Star Health & Allied Insurance, 27 lakh shares of ACC Ltd, 22 lakh shares of IIFL Finance Ltd and 15 lakh shares of Sun TV Networks Ltd. In addition, Dixon Technologies India Ltd also saw buying in small quantities in the month of August 2023. The buying was most prominent in beaten down stocks during the month of August 2023 in the mid-cap space, as well as the stocks with promise of high and robust growth.

We now turn to major mid-cap selling candidates during the month of August 2023. Mutual Funds sold 773 lakh shares of Ashok Leyland Ltd393, 393 lakh shares of GMR Airports Infrastructure Ltd, 334 lakh shares of Bharat Heavy Electricals Ltd (BHEL), 128 lakh shares of LIC Housing Finance Ltd, 37 lakh shares of Supreme Industries Ltd, 30 lakh shares of Astral Ltd, 24 lakh share of HDFC AMC Ltd, 21 lakh shares of Tata Chemicals Ltd and 20 lakh shares of Piramal Pharma Ltd. In addition, the month also smaller quantities of selling in Escorts Kubota Ltd. The selling in mid-caps was relatively heavier in August 2023, and it could be more of profit taking at higher levels with the mid-cap index already at lifetime high levels. Also, mid-caps have been outperformers in the last one year, giving more room for most of the mid-cap mutual funds to take profits off the table.

Small cap stocks churned by mutual funds in August 2023

We now turn to the small cap stocks and their definition for the purpose of the churn analysis. On market cap ranking, the stocks ranked 251st and lower are classified as small caps by AMFI. Here is a quick snapshot of key small cap stocks where mutual funds were active in August 2023. Micro caps are normally not included in this list of investable stocks.

In August 2023, mutual funds added 5,061 lakh shares of Suzlon Energy Ltd, 291 lakh shares of Piramal Pharma, 193 lakh shares of Inox Wind Ltd (fresh addition), 153 lakh shares of Jammu & Kashmir Bank Ltd, 52 lakh shares of SJS Enterprises Ltd, 29 lakh shares of BSE Ltd, 20 lakh shares of Gujarat State Fertilizers Corporation Ltd (GSFC) and 14 lakh shares of Vishnu Chemicals Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like Godrej Industries and Premier Explosives in the month of August 2023.

Let us conclude our churn analysis with the small-cap selling in the month of August 2023. Mutual funds sold 77 lakh shares of Campus Activewear, 46 lakh shares of Camline Fine Sciences Ltd, 18 lakh shares of Dwarikesh Sugars Ltd, 14 lakh shares of Anupam Rasayan Ltd and 11 lakh shares each of Jupiter Wagons Ltd and SIS Ltd. In addition, the month of August 2023 also saw mutual funds selling smaller quantities in small cap stocks like Globus Spirits, Mahanagar Gas Ltd (MGL), Dreamfolks Services Ltd and Tanla Platforms Ltd.

Finally, here are some key takeaways from the buying and selling data of mutual funds in the month of August 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, especially since market peaks give an opportunity for the fund manages to restructure their portfolios with a futuristic bias. That is exactly what the funds have been doing in August 2023 and that piece of action looks all set to continue in the months to come. With Nifty and Sensex at all-time highs, the fund manager skills are going to be tested based on how well they churn their portfolios.