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

13 Oct 2023 , 10:13 AM

The month of September 2023 was the first month of FPI selling since February 2023. The first signs were visible in August when the FPI flows had fallen from an average of $5.5 billion in May, June, and July to a low of just $1.48 billion in August. However, the trend shifted in September 2023 as FPIs ended up as net sellers to the tune of $1.78 billion. However, this did not really do any great damage to the markets. That is because, domestic mutual fund and LIC continued to play a key role in ensure that flows into equity market sustained even in the absence of FPIs. To an extent the steady flows from new fund offerings (NFOs) and the robust growth in SIPs per month have been the key driving factors in driving liquidity in the markets. Here we look at what is happening behind the flows into equity markets; that is what is the kind of churn that equity funds are doing and how it is having a stock-specific impact on large cap, mid-cap, and small cap stocks.

September 2023 story of SIP flows and equity NFOs

One can say that NFO flows were surely better in the month of September 2023 at Rs7,795 crore, but that is just marginally better than August 2023. Buik of the flows of NFOs went into multi-asset allocation funds, which is a hybrid fund with a strong equity component. However, the second biggest contributor was sector / thematic funds in terms of NFO flows. 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 fund classes and investor classes, they are predominated by retail investors and by flows into equity or equity related funds. SIP flows scaled an all-time high of Rs16,420 crore in September, the first time it was crossing the coveted Rs16,000 crore in a month. However, 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. While SIP flows are spread across different categories of mutual funds, past data shows that nearly 80% of the SIP flows gravitate towards equity funds. The moral of the story is that MFs 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 Rs14,091 crore into equity funds in September 2023 is surely attractive but it is lower than August 2023. However, that is not the most relevant thing for mutual fund churn. This net inflow of Rs14,091 crore into equity funds was driven by Rs42,155 crore of gross equity fund inflows and Rs28,064 crore of gross MF redemptions. In short, despite lower net inflows on equity funds in September 2023, the overall churn in equity funds was much higher, and that is what is relevant to us when we look at the stocks that mutual funds bought and sold in the month of September 2023. This is just the active equity funds and we are not even counting the implied equity holdings in hybrid funds and passive index funds and index ETFs. 

That brings us to the million dollar question; if the mutual fund churn was so aggressive, with gross churn of more than Rs70,000 crore, then what are the stocks that the mutual fund bought and what are the stocks that they sold in September 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 is the 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: How MFs churned in September 2023

For simplicity, we will stick to the standard AMFI definition based on market cap rankings to delineate large cap, mid cap, and small cap stocks. 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 as current as possible. Here are the major large cap stocks that the Indian mutual funds bought and sold in the month of September 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 856 lakh shares of Zomato Ltd (almost same as last month, 225 lakh shares of Adani Power Ltd, 112 lakh shares of Adani Ports & SEZ Ltd, 72 lakh shares of Vedanta Ltd, 70 lakh shares of HDFC Life Insurance Ltd, 50 lakh shares of UPL Ltd and 15 lakh shares of Eicher Motors Ltd. In addition, mutual funds also added 9 lakh shares of Bajaj Auto Ltd; and smaller quantities of Bajaj Holdings & Investments Ltd and Adani Green Energy in the month of September 2023. Interestingly, there seems to be a lot of interest among mutual funds in buying power and auto stocks, even as mutual funds were found digging for value in stocks like Zomato Ltd, Vedanta Ltd and UPL Ltd.

We now turn to major large cap selling by mutual funds in September 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 September the MF selling in large caps was relatively more subdued. Let us look at the major sell candidates. There was heavy selling of 120 lakh shares in Punjab National Bank (PNB), 96 lakh shares in Larsen & Toubro (L&T) and 67 lakh shares in Indian Oil Corporation Ltd (IOCL). These were the major sell candidates. In addition, a total of 49 lakh shares of Bharat Petroleum Corporation Ltd (BPCL), 30 lakh shares of Jindal Steel & Power Ltd, 20 lakh shares of Marico ltd, 14 lakh shares of Hindustan Aeronautics Ltd (HAL), 13 lakh shares of Pidilite Industries Ltd and 10 lakh shares of Adani Enterprises Ltd were also sold by the mutual funds among large caps in September 2023. Apart from these, mutual funds also sold smaller quantities of Berger Paints Ltd also during September 2023.

Mid-cap stocks: How MFs churned in September 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 as explained previously, 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 September 2023, showing the churn on both sides.

Let us first focus on mid-cap buying in September 2023. Overall, mutual funds added 4,084 lakh shares of Vodafone Idea Ltd, 232 lakh shares of GMR Airport Infrastructure Ltd, 203 lakh shares of L&T Finance Holdings, 131 lakh shares of Aditya Birla Capital Ltd, 26 lakh shares of Sun TV Networks, 25 lakh shares of JSW Energy, 24 lakh shares of IIFL Finance Ltd, and 20 lakh shares of Piramal Enterprises Ltd. In addition, the mutual funds also bought smaller quantities of Colgate Palmolive India Ltd and Godrej Properties in the month of September 2023. The buying was most prominent in beaten down stocks during the month of September 2023, as well as the stocks with promise of robust growth in mid-cap space.

We now turn to major mid-cap selling candidates during the month of September 2023. Mutual Funds sold 1,407 lakh shares of NHPC Ltd, 357 lakh shares of Indian Railway Finance Corporation Ltd (IRFC), 177 lakh shares of IDFC First Bank Ltd, 143 lakh shares of Bandhan Bank Ltd, 95 lakh shares of Bank of India, 58 lakh shares of Devyani International, 37 lakh share of Gujarat Gas Ltd, 20 lakh shares of HDFC AMC and 18 lakh shares of Jindal Stainless Ltd. In addition, the month also smaller quantities of selling in Bharat Dynamics Ltd. The selling in mid-caps was relatively heavier in September 2023, and it could be more of profit taking at higher levels with mid-cap index at close to lifetime high levels. Also, mid-caps have been outperformers in the last one year, so some profit taking is par for the course.

Small cap stocks: How MFs churned in September 2023

We now turn to the small cap stocks and their 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 caps by AMFI. Here is a quick snapshot of key small cap stocks where mutual funds were active in September 2023. Micro caps are normally not included in this list of investable stocks.

In September 2023, mutual funds added 260 lakh shares of Restaurants Brands of Asia Ltd, 80 lakh shares of Five Star Business Finance Ltd, 13 lakh shares of BSE Ltd and 10 lakh shares of Happiest Minds Technologies Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like Spandana Sphoorthy Financial and TVS Srichakra Ltd in the month of September 2023. In addition, mutual funds added some fresh small caps in the month to their portfolios like Aditya Vision Ltd, Shipping Corporation of India Ltd, PG Electroplast and HLE Glasscoat Ltd. Small cap additions were muted in September 2023.

Let us conclude our churn analysis with the small-cap selling in the month of September 2023. Mutual funds sold 75 lakh shares of Ujjivan Small Finance Bank (SFB), 55 lakh shares of Mangalore Refineries & Petrochemicals  Ltd (MRPL), 31 lakh shares of Camline Fine Sciences Ltd, 23 lakh shares of Tarsons Products Ltd, 10 lakh shares of ITD Cementation Ltd and 8 lakh shares each of Himadri Specialty Chemicals Ltd. In addition, the month of September 2023 also saw mutual funds selling smaller quantities in small cap stocks like Globus Spirits, Andhra Paper, Glenmark Life Sciences Ltd and Venus Pipes & Tubes Ltd.

Finally, here are some key takeaways from the buying and selling data of mutual funds in the month of September 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 are an eminent opportunity for the fund manages to restructure their portfolios with futuristic ideas. In the last few months, the Nifty and Sensex touched new highs but have struggled to maintain higher levels. On the positive side, this is a golden opportunity for fund managers to churn their portfolio and right size it. That is exactly what mutual funds have done in September 2023.