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

15 Dec 2023 , 10:57 AM

The month of November 2023 marked a turnaround for FPI action, after two persistent months of selling. FPIs had sold close to $1.50 billion in August and $3.00 billion in September in Indian equities. However, November did see a partial revival with about $1 billion of inflows into equities. The turnaround started pretty late in the month of November. It was only after the India GDP numbers for the second quarter came in much higher than expected at 7.2% and later after the RBI upgraded the GDP growth forecast for FY24 to 7.0% that the FPI flows really picked up steam. However, the big story was not just about FPI flows but about mutual fund flows too.

Mutual funds saw positive inflows into equity funds and hybrid funds, while funds into index funds were more subdued and debt actually saw net selling. But, the real takeaway for the month of 2023 was on two fronts. Firstly, the total AUM of mutual funds in India touched a high of Rs49 trillion. At nearly $600 billion, the AUM of mutual funds is now a force to reckon with reference to its influence on the equity markets. Secondly, the SIP flows into mutual funds in the November month also created another record at Rs17,073 crore. These are classic pointers towards widening of the investor base of mutual funds and also the need for fund managers to churn their portfolios more aggressively.

November 2023 saw robust gross churn and record SIP flows

One can say that NFO flows were relatively tepid in the month of November 2023 at Rs2,136 crore, and that is nearly half of the NFO flows in October 2023 and a fourth of the flows in September 2023. Buik of the flows of NFOs went into small cap and multi-cap funds during the month of October, but the contribution was not too significant. The bigger story was on SIP flows or the flows coming into mutual funds from systematic investment plans of mutual funds. While SIPs pertain to all categories of funds and investor classes, they are dominated by retail investors and by flows into equity or equity related funds. SIP flows touched an all-time high of Rs17,073 crore in November 2023, the first time it has scaled such a high level in a month. However, it must be remembered that these are gross SIP flows and the net SIP flows would be lower as they will get adjusted for redemptions and non-renewal of SIPs. The average SIP stoppage ratio is at 55%, so one can approximately assess the net SIP flows that would have come in during November 2023. Nearly 80% of the SIP flows gravitate towards equity funds. Even with FPI flows just about turning around to positive in November 2023, the SIPs were a big contributor to equity churn in the month. But the bigger story is about gross churn by the equity mutual funds.

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. Let us look at the numbers! The net flows of Rs15,536 crore in November 2023 were 22.15% lower compared to October 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 Rs15,536 crore into equity funds was driven by Rs38,886 crore of gross equity fund inflows and Rs23,349 crore of gross MF redemptions. In short, it is this overall gross flows of equity funds to the tune of Rs62,235 crore that decides how the equity stocks are churned by mutual funds in the month. 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 bigger.

That brings us to the question on mutual fund churn. If the gross churn was at Rs62,235 crore, what were the specific stocks that the mutual fund bought and what are the stocks that they sold in the month of November 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 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 November 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 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. AMFI reviews this list on a half yearly basis to dynamically update the list. Here are the major large cap stocks that Indian mutual funds bought and sold in the month of November 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 352 lakh shares of GAIL India Ltd, 197 lakh shares of Tata Power Ltd, 180 lakh shares of Vedanta Ltd, 84 lakh shares of ICICI Prudential Life Insurance Company, 60 lakh shares of Adani Power Ltd, 58 lakh shares of Bajaj Finance Ltd, 35 lakh shares of Tata Consumer Products, and 27 lakh shares of Godrej Consumer Products. In addition, mutual funds also added 12 lakh shares each of Adani Enterprises Ltd and  IRCTC Ltd in the month of November 2023. Interestingly, there seems to be a lot of interest among mutual funds in buying FMCG and Power, while the mutual funds are generally looking sector agnostic otherwise.

We now turn to major large cap selling by mutual funds in November 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 November the mutual fund selling in large caps was quite aggressive. There was heavy selling of 631 lakh shares of Bank of Baroda (BOB), 625 lakh shares in Samvardhana Motherson International, 408 lakh shares in Coal India Ltd (CIL), 190 lakh shares of Indian Oil Corporation (IOCL), and 163 lakh shares of Bharat Petroleum (BPCL). In addition, a total of 133 lakh shares of TVS Motors, 97 lakh shares of SBI Cards, and 62 lakh shares of IndusInd Bank Ltd were also sold by the mutual funds among large caps in November 2023. Apart from these, mutual funds also sold smaller quantities of stocks like Britannia Industries and Marico Ltd in the month of November 2023.

Mid-cap stocks: How MFs churned in November 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 November 2023, showing the churn on both sides.

Let us first focus on mid-cap buying in November 2023. Overall, mutual funds added 1,599 lakh shares of Vodafone Idea Ltd, 503 lakh shares of Petronet LNG Ltd, 157 lakh shares of Bandhan Bank Ltd, 150 lakh shares of Steel Authority of India Ltd (SAIL), 114 lakh shares of CG Power & Industrial Solutions, 44 lakh shares of Sun TV Networks Ltd, and 21 lakh shares of Bharat Dynamics Ltd. In addition, the mutual funds also bought smaller quantities of shares in companies like General Insurance Corporation of India (GIC), JSW Energy and Oracle Financial Services Software Ltd (OFSS) in November 2023. The buying was most prominent in select energy stocks, while the rest of the buys were largely dispersed. 

We now turn to major mid-cap selling candidates during the month of November 2023. Mutual Funds sold 342 lakh shares of Motherson Sumi Wiring, 48 lakh shares of Indraprastha Gas Ltd (IGL), 46 lakh shares of Tata Communications Ltd, 42 lakh shares of Macrotech Developers Ltd (LODHA), 33 lakh shares of Jindal Stainless Ltd (JSL), 21 lakh shares of Polycab India Ltd, and 15 lakh share of Persistent Systems Ltd. In addition, the month also smaller quantities of selling in Godrej Properties, Alkem Laboratories and Tata Chemicals. Across the large caps and the mid-caps, there has been aggressive selling in the stocks that have seen the maximum capital growth traction in the last few months, which is par for the course, with the Nifty and Sensex already trading at life-time highs.

Small cap stocks: How MFs churned in November 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 belongs to small cap stocks. 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 of lower than Rs20,000 crore, although this can be relatively dynamic with the changing market cap of Nifty and Sensex. Here is a quick snapshot of key small cap stocks where mutual funds were active in November 2023; both on the buy and sell side. Micro caps are generally excluded from this list of stocks.

In November 2023, mutual funds added 146 lakh shares of Aptus Value Housing Finance Ltd, 92 lakh shares of Ujjivan Small Finance Bank Ltd, 41 lakh shares of Granules India Ltd, 35 lakh shares of Sequent Scientific Ltd, 32 lakh shares of Shipping Corporation of India (SCI), 27 lakh shares of MOIL Ltd, 13 lakh shares of Indiamart Intermesh Ltd, and 10 lakh shares of Gujarat Ambuja Exports Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like Spandana Sphoorthy Financial Ltd and Anupam Rasayan India Ltd in November 2023. Small cap buying, as always, has been largely bottom-up and stock specific with no sectoral trends. However, financials were the preferred segment.

Let us conclude our churn analysis with the small-cap selling in the month of November 2023. Mutual funds sold 2,752 lakh shares of Suzlon Energy Ltd, 98 lakh shares of Dish TV, 30 lakh shares of Natco Pharma Ltd, 16 lakh shares of Ramakrishna Forgings Ltd, and 15 lakh shares of Sterling & Wilson Renewable Energy Ltd during the month of November 2023. In addition, mutual funds entirely exited their holding of 21 lakh shares in Tata Steel Long Products during the month. In addition, the month of November 2023 also saw mutual funds selling smaller quantities in small cap stocks like NOCIL Ltd, IFB Industries Ltd and Uniparts India Ltd.

Needless to say, here are some key takeaways from the buying and selling data of mutual funds in the month of November 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. While some of the moves have been sector-agnostic, some sectoral trends are also visible. In the last few months, Nifty and Sensex have bounced sharply from lower levels amidst positive data flows from India and the US. The volatility in the market has given fund managers the perfect opportunity to churn their portfolio and reallocate funds. That was the quick story of portfolio churn by mutual funds in November 2023.