PSU Stocks Soar as MFs Pile In: New Record Holdings, Outperformance Continues

20 Feb 2024 , 10:06 AM

In January, mutual funds (MFs) continued their trend of increasing investments in public sector company (PSU) stocks, propelling many of them to new record highs. This move comes amidst ongoing debates within the market regarding valuations and highlights the growing confidence in PSU stocks among investors.

MF holdings in public sector firms reached a historic high of 7.58% of total assets under management in January. This marked a significant increase from 5.72% a year earlier and 7.24% in the previous month. The data revealed that 769 schemes across 41 mutual funds invested in PSU stocks in January, compared to 692 schemes and 37 mutual funds a year ago. Back in January 2018, MFs had investments in only 45 listed PSUs, but this number has now surged to 71, as per Primedatabase data.

Since the beginning of 2024, the BSE PSU index has witnessed an impressive rally of 18%, contrasting with the modest 1% gain seen in the Nifty during the same period. Notably, PSUs had also outperformed the Nifty by a considerable margin of 55.3% last year, compared to the Nifty’s gain of 20%.

The market value of MF holdings in PSUs has surged significantly, surpassing ₹4 Lakh Crore in January. This marks a substantial increase from ₹2.33 Lakh Crore a year ago and ₹3.7 Lakh Crore in the previous month. It’s worth noting that during the height of the pandemic in May 2020, the value of MF holdings in PSUs had plummeted to a low of ₹1 Lakh Crore.

Mutual funds have identified several top picks among public sector undertakings (PSUs), including SBI, NTPC, Coal India, Power Grid, ONGC, Power Finance Corp, and REC. SBI leads the pack with 105.88 Crore shares valued at ₹67,814 Crore, followed by NTPC with 179.14 Crore shares worth ₹56,877 Crore, and Coal India with 65.05 Crore shares valued at ₹26,420 Crore. Power Grid and ONGC also hold significant positions, with MF holdings of 97.13 Crore shares (Rs 25,187 Crore) and 91.20 Crore shares (Rs 23,000 Crore), respectively.

Until recently, investors were hesitant to invest in PSU stocks due to concerns that shareholder value might not be a priority for the government. Additionally, the perception of slow revenue growth contributed to this sentiment. However, the scenario has undergone a significant change. Increased government spending on capital expenditure has resulted in improved earnings for PSU companies operating in sectors such as power, defence, engineering, and railways. Furthermore, PSU banks now appear more attractively valued compared to their private counterparts due to enhancements in asset quality.

The optimistic outlook for PSU stocks has triggered a virtuous cycle wherein rising prices are attracting more investors, consequently driving prices even higher. This positive sentiment reflects a newfound confidence in the potential of PSU companies to deliver value to shareholders and contribute to overall market growth.