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

12 Jan 2024 , 09:20 AM

December 2023 was a month of mutual fund records

The month of December 2023 was surely a month of several records for Indian mutual funds. To begin with, the total AUM of mutual funds at a macro level crossed the Rs50 trillion mark for the first time ever. At Rs50.78 trillion, the total AUM of Indian mutual funds is now worth $610 billion. If you combine the AUM of Indian mutual funds with the total funds managed by LIC, then you have nearly $1.2 trillion of assets under management. That is a good offsetting force to the $737 billion of FPI AUM. For now, we have not even considered the AUM of private sector insurance companies and the government provident funds, and if that is added, the actual number is much bigger. This number is significant because it around the $1 trillion mark that the US also saw momentum picking up in terms of mutual fund AUM.

However, the total AUM was just part of the story on mutual fund records. The SIP flows at a gross level during December 2023 also scaled a life time high of Rs17,610 crore. At this pace, it looks perfectly likely that India may scale the Rs20,000 crore mark by the end of FY24 and that would be the big momentum shift for SIP flows. The good news is also that the SIP stoppage ratio is coming down, so the SIPs are now contributing more on a net basis. While total folios of mutual funds are already above 16 crore, the real story is the rapid growth in the SIP folios. As of the end of December 2023, the SIP folios had touched 9.96 crore and reports from mutual fund registrars indicate that as of the first week of January 2024, the 10 crore mark has already been crossed for mutual fund SIP folios. That is a big leap for an industry that used to get average SIPs of Rs3,000 a month about 6 years back.

Gross flows into mutual funds and the churn story

Why has there been persistent churn in equities by mutual funds. That is largely linked to the flows that come into equity funds. Remember, churn is not just about 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. That is different from the net flows that you normally talk about. Let us look at the gross numbers! The net flows of Rs16,997 crore into equity funds in December 2023 were 9.4% higher than the flows in November 2023. However, the more relevant data point for mutual fund churn is the gross flows. Here is what the gross flows are indicating. This net inflow of Rs16,997 crore into equity funds was driven by Rs50,671 crore of gross equity fund inflows and Rs33,674 crore of gross MF redemptions. In short, it is this overall gross flows of equity funds to the tune of Rs84,345, which is a good 35.53% higher than the gross flows of Rs62,235 crore in the month of November 2023. That means, even the churn by mutual funds in equities must have been sharply higher in December as compared to November 2023. 

These numbers only pertain to active equity funds. For now, we are not even counting implied equity holdings in hybrid funds and passive index funds and index ETFs; and with that the number will be much bigger. That brings us to the question on mutual fund churn. If the gross churn was at Rs84,345 crore in December 2023, what were the specific stocks that the mutual fund bought and what are the stocks that they sold in the month of December 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 their respective mutual fund portfolios. Here is the granular picture of mutual fund portfolio churn, based on market capitalization of stocks across large caps, mid-caps, and small caps. Here we stick to the SEBI definition of capitalization, but more about that later.

Large cap stocks: How MFs churned in December 2023

For simplicity, we will stick to the AMFI definition based on market cap rankings to delineate large cap, mid cap, and small cap stocks. As you would be aware, this list of stocks updated twice a year. The change in January is applicable upto the end of June and the change in July is applicable up to December that year. As per AMFI methodology, the combined universe of listed stocks on NSE and BSE are first ranked descending on market capitalization. Then the relevant stock exchange is selected based on higher volumes. From this list, the top-100 stocks by market cap are classified as large cap stocks. Here are the major large cap stocks that Indian mutual funds bought and sold in the month of December 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 713 lakh shares of Zomato Ltd, 249 lakh shares of Tata Power Ltd, 145 lakh shares of Mankind Pharma Ltd, 122 lakh shares of Dabur India Ltd, 120 lakh shares of Wipro Ltd, 73 lakh shares of Life Insurance Corporation (LIC), 65 lakh shares of Adani Power, 48 lakh shares of Vedanta Ltd and 39 lakh shares of JSW Steel Ltd. In addition, mutual funds also added 12 lakh shares Berger Paints Ltd during the month of December 2023. Interestingly, there seems to be a lot of interest among mutual funds in adopting a bottom up approach, even to large cap stocks, as no visible macro or industry level theme appears to be present in these numbers.

We now turn to major large cap selling by mutual funds in December 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 December the mutual fund selling in large caps was relatively less aggressive compared to October and November 2023. There was heavy selling of 263 lakh shares of Indian Oil Corporation (IOCL), 96 lakh shares of Cholamandalam Investments & Finance Company, 63 lakh shares in HDFC Life Insurance, 46 lakh shares of Adani Ports and Special Economic Zone (APSEZ), and 29 lakh shares of Indian Railway Finance Corporation (IRFC). In addition, a total of 14 lakh shares of Ultratech Cement Ltd, 13 lakh shares of Dr Reddy’s Laboratories, and 11 lakh shares of Adani Enterprises Ltd were also sold by the mutual funds among large caps in December 2023. Apart from these, mutual funds sold smaller quantities of stocks like Adani Total Gas and Adani Energy Solutions in the month of December 2023.

Mid-cap stocks: How MFs churned in December 2023

Let us quickly turn to 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 already explained above, 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 December 2023, showing the churn on both sides.

Let us first focus on mid-cap buying in December 2023, which was quite heavy in select counters. Overall, mutual funds added 1,477 lakh shares of Bank of India, 862 lakh shares of Steel Authority of India Ltd (SAIL), 462 lakh shares of GMR Airports Infrastructure, 459 lakh shares of Indian Bank Ltd, 282 lakh shares of Bandhan Bank Ltd, 202 lakh shares of Apollo Tyres Ltd, 147 lakh shares of Nippon Life India Asset Management Company Ltd, and 105 lakh shares of One97 Communications Ltd (Paytm). In addition, the mutual funds also bought 36 lakh shares of JSW Energy Ltd in December 2023. The buying was most prominent in select PSU stocks, with special focus on banking PSU stocks, where a lot of traction has been visible in the last few months.

We now turn to major mid-cap selling candidates during the month of December 2023. Mutual Funds sold 470 lakh shares of Suzlon Energy Ltd, 457 lakh shares of recently listed Indian Renewable Energy Development Agency (IREDA), 229 lakh shares of Ashok Leyland Ltd, 167 lakh shares of Hindustan Petroleum (HPCL), 65 lakh shares of Aditya Birla Capital, 56 lakh shares of JSW Infrastructure Ltd, and 24 lakh share of Poonawala Fincorp Ltd. In addition, the month also smaller quantities of selling in Vedant Fashions (Manyavar), Tata Technologies and Glaxo Pharma. Across the large caps and the mid-caps, there has been aggressive selling in stocks in the last few months. However, in December, while the buying was aggressive in large caps and in mid-caps, the selling was prominent only in mid-caps. The largely cap selling was relatively subdued in the month of December 2023.

Small cap stocks: How MFs churned in December 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 of all the remaining stocks belongs to small cap list. 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. This roughly corresponds to companies with a market capitalization of lower than Rs20,000 crore, although this can be relatively dynamic with the changing market cap of Nifty and Sensex. Here is a snapshot of key small cap stocks where mutual funds were active in December 2023; both on the buy and sell side. Micro caps are generally excluded from this list of stocks and are generally avoided due to liquidity and impact cost issues in larger sized transactions.

On the small cap buying front, there was interestingly a lot of new names that got added during the month of December 2023. Out of the top 10 stocks that saw accretion in mutual fund holdings in the small cap space, it entailed 7 fresh additions and 3 stake enhancements. In the month of December 2023, increased its stake in JK Tyres by 116 lakh shares, Himadri Specialty Chemicals by 25 lakh shares and Jubilant Pharmova by 17 lakh shares. In terms of fresh addition among small caps, mutual funds added 115 lakh shares of India Shelter Finance IPO, and 49 lakh shares of the Inox India IPO. In addition, mutual funds also added smaller quantities of small cap stocks like Arman Financial, Heubach Colorants, KPI Green Energy, Sandur Manganese, and Seamec Ltd. Small cap buying, as always, has been largely bottom-up and stock specific with no sectoral trends. That was the case in December 2023 also.

Let us conclude our churn analysis with the small-cap selling in the month of December 2023. Mutual funds sold 450 lakh shares of Indiabulls Housing Finance Ltd, 98 lakh shares of Delta Corp, 57 lakh shares of Castrol India Ltd, 29 lakh shares of Tracxn Technologies, 19 lakh shares of Sagar Cements Ltd, and 11 lakh shares of TVS Holdings Ltd during the month of December 2023. In addition, mutual funds also sold smaller quantities of stocks like Fino Payments Bank, Zaggle Prepaid Ocean Services, Gulf Oil Lubricants Ltd, and Lux Industries Ltd. Compared to small cap buying, the selling was much more intense.

What we read from the MF portfolio shifts

Needless to say, here are some interesting takeaways from the buying and selling data of mutual funds for December 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 at a time when Nifty and Sensex are at life-time highs. In addition, the selling has also been a lot more intense in small caps and mid-caps, hinting at a move towards safety. It looks like the volatility in the market has given fund managers the perfect opportunity to churn their portfolio and reallocate funds. The substantial churn in terms of gross equity fund flows also helped this churn to a great extent.