How MFs churned large caps, mid-caps, and small caps in January 2024

15 Feb 2024 , 09:17 AM

January 2024 belonged to debt mutual funds

The  month of January 2024 clearly belonged to the debt funds. Out of the total net inflows in the month of ₹1,23,205 Crore, debt funds accounted for net inflows of ₹76,469 Crore. One can argue that the inflows were dominated by the short term debt funds like liquid funds, overnight funds, and money market funds; but that is where the yields are robust due to the liquidity shortfall in the money markets. Debt fund flows have been erratic over the last 12 months and typically the end of each quarter sees a surge of outflows due to corporates withdrawing money for their advance tax and GST payments. This has kept the Debt fund flows erratic over time. However, If the debt funds accounted for 62.07% of the total net inflows in January 2024, the balance was largely accounted for flows into equity funds and hybrid funds, although flows into passive funds have been relatively passive. 

Equity funds had an interesting narrative too

The big story of equity funds was not just about the flows or the value accretion, but about the increase in the number of SIPs. If the contribution of NFOs to fresh flow accretion has been limited in the last few months, it has been more than made up by the SIP flows and folio accretion. That is a much stronger barometer of retail participation in general, and retail participation in equity funds in particular. Total SIP flows in January 2024 stood at a record level of ₹18,838 Crore while the total number of SIP outstanding folios stood at a record level of 7.92 Crore. Today, SIP folios account for 46.7% of all the folios of mutual funds, although they may be accounting for just about 19.5% of the overall AUM. The mismatch that you see between these two data points, is a clear indication that the SIPs are the best proxy for retail intensity and retail interest in mutual funds. 

Gross flows, redemptions, and equity fund churn

Why has there been persistent churn in equities by mutual funds. That is largely linked to the intensity of flows into equity funds. Churn is not just about net inflows into equity funds but the gross flows and the gross redemptions, which jointly decide the overall churn. The net inflows are the difference between the gross inflows and the gross redemptions. Let us look at the gross numbers for January 2024! The net flows of ₹21,781 Crore into equity funds in January 2024 were 28.2% higher than the net flows in December 2023. However, the more relevant data point for mutual fund churn is the gross flows and the gross redemptions as that is the volume of flows that determines the churn. Here is what the gross flows look like. The net inflow of ₹21,781 Crore into equity funds was driven by ₹50,831 Crore of gross equity fund inflows and ₹29,050 Crore of gross MF redemptions. In short, it is this overall gross flows of equity funds to the tune of ₹79,881, which is actually a tad lower than gross flows in December 2023. That is still indicative of fairly elevated levels of equity churn by the equity funds during January 2024.

The numbers above 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. If that is added, the actual effective churn would be much higher. That brings us to the question on mutual fund churn. If the gross churn was at ₹79,881 Crore in January 2024, what were the specific stocks that the mutual fund bought and what are the stocks that they sold in the month of January 2024. That is what equity market churn is all about. 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 existing mutual fund portfolios and align it with the changing dynamics of the market. Here is the granular picture of mutual fund portfolio churn, across large cap, mid-cap, and small cap stocks in January 2024. Here we stick to the SEBI definition of capitalization, but more about that later.

Large cap stocks: How MFs churned in January 2024

For simplicity, we just stick to the AMFI definition based on market cap rankings to delineate large cap, mid cap, and small cap stocks. This list of stocks gets updated twice a year and is used as the benchmark by mutual funds too. As per the AMFI prescribed methodology, the combined universe of listed stocks on NSE and BSE are ranked descending on market cap. 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 (or churned) in January 2024.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 527 Lakh shares of HDFC Bank Ltd, 191 Lakh shares of Vedanta Ltd, 91 Lakh shares of Kotak Mahindra Bank, 70 Lakh shares of ICICI Prudential Life Insurance, 46 Lakh shares of IndusInd Bank Ltd, 31 Lakh shares of Adani Power Ltd, 28 Lakh shares of Asian Paints Ltd, 22 Lakh shares of Maruti Suzuki Ltd and 13 Lakh shares of Britannia Industries Ltd. In addition, mutual funds also added 8 Lakh shares Eicher Motors Ltd during the month of January 2024. Interestingly, there seems to be a lot of interest among mutual funds in buying up large cap banking shares, especially since most of these stocks have corrected sharply in the last couple of months and are now offering attractive entry points. 

We now turn to major large cap selling by mutual funds in January 2024. 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 January 2024 the mutual fund selling in large caps was fairly aggressive compared to the previous month. There was heavy selling of 396 Lakh shares of Punjab National Bank (PNB), 268 Lakh shares of Bharat Petroleum Corporation Ltd (BPCL), 192 Lakh shares in India Railway Finance Corporation (IRFC), 156 Lakh shares of Ambuja Cements, 121 Lakh shares of Adani Ports SEZ, 109 Lakh shares of Tech Mahindra, 36 Lakh shares of Varun Beverages and 19 Lakh shares of LTI Mindtree. In addition, a total of 16 Lakh shares of Berger Paints Ltd and 12 Lakh shares of Siemens Ltd were also sold by the mutual funds among large caps in January 2024. The selling was focused on stocks that have rallied sharply in the last few weeks.

Mid-cap stocks: How MFs churned in January 2024

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 January 2024, showing the churn on both sides.

Let us first focus on mid-cap buying in January 2024, which was quite heavy in select counters. Overall, mutual funds added 390 Lakh shares of Suzlon India Ltd, 343 Lakh shares of Bank of India (BOI), 169 Lakh shares of GMR Airports Infrastructure, 129 Lakh shares of One97 Communications Ltd (Paytm), 102 Lakh shares of AU Small Finance Bank, 88 Lakh shares of Jubilant Foodworks Ltd, 87 Lakh shares of CG Power & Industrial Solutions, and 85 Lakh shares of Star Health & Allied Insurance Ltd. In addition, the mutual funds also bought 31 Lakh shares of IIFL Finance Ltd and 26 Lakh shares of Jindal Stainless Ltd (JSL) in January 2024. The buying was most prominent in select stocks that have been beaten down, although the aggressive buying in Paytm does look quite surprising at this juncture.

We now turn to major mid-cap selling candidates during the month of January 2024. In the mid-cap space, the mutual funds sold substantial quantities in Zee Entertainment and NHPC Ltd. The selling in Zee was quite obvious, especially after the deal with Sony collapsed and the stake came up for a slew of downgrades. NHPC is a PSU hydropower stock that has rallied sharply and there has been some persistent profit booking on the counter. Vodafone Idea (VI) also came for some heavy selling during the month after the company continued to lose market share and the financial condition continued to be precarious and fresh funds were not really forthcoming. Federal Bank also saw some selling in the mid-cap space by the mutual funds, especially after the bank had witnessed fairly aggressively buying and a rally in the last few months.

Small cap stocks: How MFs churned in January 2024

We now turn to the small cap stocks; which is also referred to as the residual list. The 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; which roughly corresponds with companies below the market cap range of ₹20,000 Crore. This level is dynamic and has been shifting upwards in the recent past. Here is a snapshot of key small cap stocks where mutual funds were active in January 2024; both on the buy and sell side. Micro caps are generally excluded from this list of stocks to avoid the liquidity trap, which is a challenge in most micro-cap stocks.

On the small cap buying front, there was interestingly a lot of new names that got added during the month of January 2024. Out of the top 10 stocks that saw accretion in mutual fund holdings in the small cap space, it entailed 2 fresh additions and 8 stake enhancements. In the month of January 2024, mutual funds increased their stake in Tips Industries by 91 Lakh shares, Hi-Tech Pipes by 51 Lakh shares, Pricol Ltd by 51 Lakh shares, Rain Industries by 48 Lakh shares, Himadri Specialty Chemicals by 36 Lakh shares and Anand Raj Industries by 26 Lakh shares. Mutual funds also added smaller quantities of Axiscades Technologies and Gufic Biosciences during the month. In terms of fresh addition among small caps, mutual funds added 26 Lakh shares of Capacite Infraprojects and 16 Lakh shares of Transformers and Rectifiers Ltd. Small cap buying, as always, has been largely bottom-up and stock specific with no sectoral trends. That was the case in January 2024 also.

Let us conclude our churn analysis with the small-cap selling in the month of January 2024. Mutual funds sold 171 Lakh shares of Allcargo Logistics Ltd, 51 Lakh shares of Indiabulls Real Estate, 25 Lakh shares of Krsnaa Diagnostics Ltd, 17 Lakh shares of Eveready Industries, 13 Lakh shares of Bayer India Ltd, and 12 Lakh shares of Wonderla Holidays Ltd during the month of January 2024. In addition, mutual funds also sold smaller quantities of DCM Shriram Ltd. During the month, mutual funds fully exited 3 small cap stocks viz. Agro Tech Foods, Tata Coffee and Hikal 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 January 2024. 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 more a normal course to adopt when markets are at lifetime highs. January 2024 also saw intense selling in small caps and mid-caps, hinting at a move to safety. Fund managers are leveraging market volatility to churn their portfolio and reallocate funds. The substantial churn in terms of gross equity fund flows assisted in this churn to a great extent.