Large cap, mid-cap, and small caps that MFs traded in February 2024

21 Mar 2024 , 10:10 AM

FEBRUARY 2024 WAS AGAIN DOMINATED BY DEBT MUTUAL FUNDS

The  month of February 2024 once gain belonged to the debt funds. Out of the total net inflows in the month of ₹1,18,351 Crore, debt funds accounted for net inflows of ₹63,809 Crore; or nearly 54% of the net inflows. Once again, the inflows were dominated by the short term debt funds like liquid funds, which virtually dominated the flow story as the month saw a lot of serious short term money preferring liquid funds over arbitrage funds.

Debt fund flows have been erratic over the last 12 months and the next month of March 2024 could once again likely see outflows, as corporate and institutional investors redeem their liquid funds for taking care of advance tax and GST payments. If the debt funds accounted for 54% of the total net inflows in February 2024, the balance was largely accounted for by strong flows into equity funds; followed by hybrid funds and passive funds. Passive funds showed a bounce after a long time in the month of February 2024.

EQUITY FUNDS SAW BEST INFLOWS OF LAST ONE YEAR IN FEB-24

In the month of February 2024, equity fund flows got a fillip from SIP flows and NFO inflows, apart from the regulatory secondary flows into equity markets. The markets scaling peaks has led to a lot of new investors coming into the equity funds market. On the equity funds front, there was deepening and broadening of the market. We saw a sharp spike in the SIP folios and SIP AUM showing that the mass of SIP investors were also growing. Thematic funds showed a lot of NFO traction in the month, although this can be largely attribute to the SBI Energy Opportunities Fund, which garnered bulk of the thematic inflows in Feb-24.

If the contribution of NFOs to fresh flow accretion was limited in last few months, it was more than made up by SIP flows and folio accretion. In February, NFO flows and SIP flows were both robust. That is a much stronger narrative of retail participation in general, and retail participation in equity funds in particular. Total SIP flows in February 2024 stood at a record level of ₹19,187 Crore while total number of SIP outstanding folios stood at a record level of 8.20 Crore. Today, SIP folios account for over 49% of all the folios of mutual funds, although they account for just about 19.5% of the overall AUM. Clearly, most of the incremental flows into equity funds are being driven by the SIP flows in recent months.

WHY GROSS FLOWS AND REDEMPTIONS MATTER MORE TO PORTFOLIO CHURN

What determines the churn of stocks by the mutual funds. While some of it is driven by valuation based reallocation, a lot of the churn is driven by how much of flows come into mutual funds on a gross basis and how much of fund redemptions are happening in India. Why is there a persistent churn in equities by mutual funds. That is linked to a large extent 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 simply measure the difference between the gross inflows and the gross redemptions. Let us look at the gross numbers for February 2024! The net flows of ₹26,866 Crore into equity funds in February 2024 were 23.35% higher than the net flows in January 2024. In the last 2 months, the net inflows have grown more than 51%. However, the more relevant data point for mutual fund churn is the gross flows and the gross redemptions as it is the volume of flows that determines the churn. That is the total money moving. Here is what the gross flows look like. The net inflow of ₹26,866 Crore into equity funds in February 2024, was driven by ₹58,923 Crore of gross equity fund inflows and ₹32,057 Crore of gross MF redemptions. While gross redemptions were also higher than January 2024, the gross inflows were sharply higher in February 2024. The point here is that, it is this overall gross flows of equity funds to the tune of ₹90,980 crore, which is sharply higher than January 2024, that will decide the extent of churn by the mutual funds. That is still indicative of fairly elevated levels of equity churn by the equity funds during February 2024.

In the previous paragraph, we have only spoken about active equity funds. However, in reality, the implied equity holdings in hybrid funds, passive index funds and index ETFs will also have an impact on the overall churn. If that is added, the actual effective churn would be much higher. That brings us to the more important question on mutual fund churn. If the gross churn was at ₹90,980 Crore in February 2024, then how did all that money reflect in terms of stock market churn. What were the specific stocks that the mutual funds bought and what are the stocks that they sold in the month of February 2024. That is what equity market churn is all about. There is something we need to appreciate here. 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 underlying dynamics of the market. This is quite routine. We now turn to the granular picture of mutual fund portfolio churn, across large cap, mid-cap, and small cap stocks in February 2024. Our focus will remain on the standard textbook SEBI definition of market capitalization. We will explain that along the way.

LARGE CAP STOCKS MUTUAL FUNDS BOUGHT AND SOLD IN FEBRUARY 2024?

How do we define large caps? As we stated earlier, we stick to the SEBI definition of large caps, mid-caps and small caps based on ranking of stocks on market capitalization. That is the definition that is executed by AMFI on a six-monthly basis. As per AMFI methodology, the combined universe of listed stocks in India on the NSE and the BSE are ranked descending based on market cap. Out of this list, the top-100 stocks by market capitalization (the most valuable) are classified as large cap stocks. Here the market cap of the exchange with the higher volume is considered. This list is monitored and reviewed by AMFI on a half yearly basis to ensure definitions are current. Here are the major large cap stocks that mutual funds bought and sold in February 2024.

Let us start with the mutual fund large cap buys first! There was substantial amount of churn on the buy side of mutual funds for large caps. Among the large caps, the mutual funds continued to buy heavily into HDFC Bank. As of February 2024 close, the mutual funds hold close to 1,400 million shares of HDFC Bank and the surge in buying is more due to the adjustment after the merger with HDFC Ltd. Mutual Funds were concerted buyers in HDFC Bank in December 2023 and January 2024 also. Among the other large cap stocks that the mutual funds bought in February 2024 were Tata Steel, Union Bank of India, Indian Oil Corporation Ltd (IOCL), and Power Grid Corporation Ltd. Mutual fund activity has been relatively subdued in large caps, which is understandable considering it is end of FY24.

We now turn to major large cap selling by mutual funds in February 2024. The selling was prominent in select stocks that rallied sharply in the recent past or had shown good value traction. Tata Power and NTPC saw unwinding among the large caps after their stellar rally in the last few months. Another stock that has rallied sharply, Sun Pharma, saw some profit booking, although it still remains a favourite among the mutual fund managers. The unwinding in PNB was also post the rally, while the selling in ITC could be attributed to the news of BAT selling stake in ITC, which has been around since the start of the year.

MID-CAP STOCKS MUTUAL FUNDS BOUGHT AND SOLD IN FEBRUARY 2024?

Let us first go over to the methodology used to classify a stock as mid-cap? As per the AMFI definition, once the top 100 stocks by market cap are classified as large cap stocks (as explained in the previous point on large caps), the stocks ranked 101st to 250th on the market cap scales will automatically qualify as mid-caps. Here are the mid-cap stocks mutual funds bought and sold in February 2024.

Let us first focus on the mid-cap buying in February 2024, first and foremost. In the mid-cap space, being largely a bottom-up alpha space, the stock buying was very stock specific. Swan Energy (a realty company) saw interested buyers on good traction in its key projects. India Energy Exchange has been on the radar of mutual fund for some and that also saw buying. Among the other stocks in the mid-cap space that saw buying were AU Small Finance Bank and Federal Bank. Both were bottom-up stock picks and were news specific. The mid-cap buying was focused on alpha seeking, targeting value proposition with momentum.

We now turn to major mid-cap selling. In February 2024, Mutual Funds sold into several stocks in the mid-cap space in February 2024. Needless to say, the stock that showed the maximum selling pressure from mutual funds was Paytm. After the RBI ban on Paytm Payments Bank Ltd, it has got a lifeline for now. However, mutual funds have been perturbed by the speculative content in the stock and many funds have exited the stock for good. Biocon saw selling with not updates on the group value discovery from Biocon Biologics. LIC Housing Finance and Bandhan Bank saw selling as there was a general shift towards established banks to overcome the recent RBI aggression.

SMALL CAP STOCKS MUTUAL FUNDS BOUGHT AND SOLD IN FEBRUARY 2024?

Finally, we turn to the small cap stocks. These are referred to as the residual list stocks. On market cap ranking, the stocks ranked 251st and lower are classified as small caps by AMFI. Here is a quick snapshot of some of the key small cap stocks where mutual funds were active in February 2024; both on the buy side and on the sell side. Small caps are essentially bottom-up stocks, but tend to show higher levels of volatility than large cap stocks.

In February 2024, the top small cap buys of Indian mutual funds were Kalyan Jewellers, Data Patterns and Mahanagar Gas Ltd (MGL). The buying was seen in MGL despite the price of gas being cut by Rs2 in the month. However, this is likely to be neutral since the international cost of CNG is also down. Kalyan Jewellers has been among the top performers while Data Patterns has been a safe bet on the Indian defence sector. Among other stocks, the mutual funds were also buyers in stocks like Latent View Analytics, another defence related stock, and IndiaMart Intermesh.

Finally, let us look at small-cap selling in February 2024. In fact, with the major sell-off seen in the small cap stocks in the last 1 months, mutual funds also turned aggressive sellers as they opted to take profits off the table. The mutual funds were aggressive sellers in Capri Global, MMTC Ltd, Lux Industries and Tarsons Products. In addition, mutual funds also sold into stocks like India Pesticides, TTK Healthcare, Rama Steel Tubes and Tourism Finance Corporation. Some of the better known small cap names where the mutual funds sold out were companies like Bata India, Aditya Birla Fashions, City Union Bank, Navin Fluorine etc.

What did we read from the February 2024 mutual fund churn data? In the large caps, there is a clear profit booking happening in the stocks that rallied in the last one year. They have moved to safety in the large caps and that trend is also visible in mid-caps and small caps; where enduring stories like defence are seeing a lot of takers. Overall, there has been a deliberate attempt by the mutual funds to underplay smaller stocks in the portfolio.