How mutual funds churned large caps, mid-caps, and small caps in July 2023?

14 Aug 2023 , 09:57 AM

FPIs had infused $5.3 billion into Indian equities in May 2023 and $5.7 billion in June 2023, with July 2023 seeing additional inflows of $5.7 billion. In short close to $17 billion of FPI flows came into Indian equities in the last 3 months. In such a scenario, the domestic mutual funds did not have much to do. Even as SIP flows continued to be robust in the month of July 2023, at Rs15,245 crore, the NFOs were evenly distributed between equity funds and debt funds in the month. However, the figure of Rs15,245 crore into Indian SIPs is the gross figure and the net figure would be much lower if you factor in the redemptions also. 

July 2023 story of SIP flows and equity churn

One can say that NFO flows were surely better in the month of July 2023 at Rs6,723 crore. However, nearly 50% of these flows were into debt funds, so they did not impact the equity fund AUM in any meaningful way. However, SIP flows at Rs15,245 crore was at record highs, crossing the Rs15,000 mark for the first time in history. In short, 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 Rs7,626 crore into equity funds may appear to be quite moderate. However, this was driven by Rs38,037 crore of gross equity fund inflows and Rs30,411 crore of gross MF redemptions. When you are up against that volume of inflows and outflows, equity churn by the mutual funds was almost inevitable. 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. 

With gross SIP flows at Rs15,245 crore, marking the highest flows ever, the turnstiles kept ringing. 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. If one looks at the overall AUM of mutual funds, it touched Rs46.38 trillion for the first time ever. AUM is a combination of flows and accretion in market value, and most of the AUM growth this time around came from accretion in market value. The AUM surge in July 2023 was largely driven by accretion in equity valuations due to a spike in the index levels. The Nifty may have met resistance at 20,000 levels, but there were enough stock specific stories.

Now that equity funds were aggressively churning their portfolios, as is evident from the gross numbers of sales and redemptions of equity funds in July 2023, the million dollar question is what did they buy and what stocks did they sell. 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, as is the norm with the fund managers. Here we look at a granular picture of mutual fund portfolio churn, based on market capitalization of stocks.

Large cap stocks churned by mutual funds in July 2023

How exactly do we define large caps? For simplicity, we will prefer to stick to the 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 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 July 2023.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 487 lakh shares of Coal India Ltd, 99 lakh shares of Tata Power Ltd, 71 lakh shares of DLF Ltd, 70 lakh shares of HDFC Life Insurance Life Ltd, 67 lakh shares of UPL Ltd, 56 lakh shares each of JSW Steel & Adani Ports SEZ, 33 lakh shares of Godrej Consumer Products and 17 lakh shares each of Adani Enterprises Ltd. Apart from the above, mutual funds added smaller quantities of Bajaj Auto Ltd too. Interestingly, there seems to be a lot of interest among mutual funds in buying power stocks, especially the ones with foray into green power.

We now turn to major large cap selling by mutual funds in July 2023. The selling was prominent in the stocks that had rallied sharply in the recent past, especially some specific stories like ONGC, Eicher Motors and Bajaj Finserv. Let us look at the major sell candidates. There was heavy selling of 371 lakh shares in Oil and Natural Gas Corporation (ONGC). In addition, a total of 41 lakh shares of Bajaj Finserv, 23 lakh shares of Varun Beverages, 18 lakh shares of Havells ltd, 17 lakh shares of Eicher Motors and 12 lakh shares of the recently listed IPO, Mankind Pharma Ltd, were sold in July 2023. Apart from these, mutual funds also sold smaller quantities of Torrent Pharma, ABB India, Dr Reddy’s Laboratories and Hindustan Zinc Ltd during the month of July 2023.

Mid-cap stocks churned by mutual funds in July 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 mid-caps. Here are the mid-cap stocks that mutual funds bought and sold in the month of July 2023.

Let us first focus on mid-cap buying in July 2023. Overall, mutual funds added 1,536 lakh shares of Vodafone Idea Ltd, 259 lakh shares of Steel Authority of India Ltd (SAIL), 157 lakh shares of Indus Towers Ltd, 100 lakh shares of Prestige Estate Projects Ltd, 91 lakh shares of Petronet LNG Ltd, 89 lakh shares of Aurobindo Pharma Ltd, 71 lakh shares of Star Health & Allied Insurance Company, 57 lakh shares Bank of Maharashtra and 56 lakh shares of IIFL Finance Ltd. In addition, JSW Energy also saw buying in small quantities in the month of July 2023. The buying was most prominent in beaten down stocks during the month of July 2023 in the mid-cap space.

We now turn to major mid-cap selling. In July 2023. Mutual Funds sold 358 lakh shares of Motherson Sumi Wiring Systems, 231 lakh shares of Power Finance Corporation (PFC), 85 lakh shares of Max Healthcare Institute Ltd, 63 lakh shares of Gujarat Gas Ltd, 16 lakh shares of Polycab India Ltd, 13 lakh share of Tata Chemicals Ltd, 10 lakh shares of Godrej Properties Ltd and 9 lakh shares of Sun TV Network Ltd. In addition, the month also smaller quantities of selling in Deepak Nitrite Ltd and Piramal Enterprises Ltd (PEL). The selling in mid-caps was relatively heavier in July 2023, and it could be more of profit taking at higher 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 July 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 July 2023. Micro caps are normally not included in this list of investable stocks.

In July 2023, mutual funds added 87 lakh fresh shares of Mangalore Refineries & Petrochemicals Ltd (MRPL), 63 lakh shares of Karnataka Bank, 58 lakh shares of Piramal Pharma Ltd, 36 lakh shares of Amara Raja Batteries Ltd, 25 lakh shares of Railtel Corporation of India and 18 lakh shares of Ujjivan Financial Services Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like BSE Ltd, Tanla Platforms Ltd and Glenmark Life Sciences Ltd; apart from mutual funds taking fresh positions in Borosil Ltd in the month of July 2023.

Let us conclude our churn analysis with the small-cap selling in the month of July 2023. Mutual funds sold 521 lakh shares of IDFC Ltd, 313 lakh shares of Hindustan Construction Company (HCC), 144 lakh shares of RBL Bank, 41 lakh shares of Electrosteel Castings Ltd, 25 lakh shares of Granules India Ltd, 17 lakh shares each of Intellect Design Arena Ltd and 10 lakh shares of Dreamfolks Services Ltd. In addition, the month of July 2023 also saw mutual funds selling smaller quantities in small cap stocks like Action Construction Equipment (ACE), Stylam Industries Ltd and Happiest Minds Technologies Ltd.

Finally, here are some key takeaways from the buying and selling data of mutual funds in the month of July 2023? The churn appears to be a case of fund staking profits out of the rallying stocks and reallocating to the beaten down stocks. Markets peaks are generally the right time to restructure the portfolio in favour of potential gains and the trigger for such an action is when the market persistently faces resistance at higher levels. That is exactly what the funds have been doing in July 2023 and that piece of action looks all set to continue in the months to come.