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What Stocks, Sectors on Mutual Funds’ Radar?

Author: Kumar Shankar Roy/Wednesday, June 24, 2020/Categories: Exclusive

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What Stocks, Sectors on Mutual Funds’ Radar?

MFs, an important investor segment in the domestic market, are also selling select stocks and becoming negative about a few sectors; Explore how debt funds are placed in terms of investments

Mutual funds (MFs) have become an important player in domestic markets, as equity investment culture in India becomes more ‘Atmanirbhar’. It serves investors well if they can interpret and analyse MF activity. In this article, we will take a look at equity MFs are playing with the Indian stock market. Despite a three per cent gain in the stock market in May, net monthly inflows into equity mutual funds fell for the second month in a row. Cash levels are now at a nine-month high after remaining stable for few months. In comparison, FPI (Foreign Portfolio Investor) outflows continued for the third month but at a slower pace. Which stocks and sectors are mutual funds buying? What is on their selling list? Also, at the very end, we also take a look at how debt funds have shaped up in terms of investments. Read to know more.

MF size, assets managed

After rising 14.1 per cent in the previous month, equity AUM (incl. ELSS) of domestic MFs declined 1.4 per cent MoM to Rs 6.9 lakh crore in May 2020 owing to bleak market sentiment. Redemptions declined 7.6 per cent MoM to Rs8,100 crore, but an even higher fall in equity scheme sales (-11.6% MoM to Rs 13,700 crore – the lowest in 46 months) led to a decline in net inflows from Rs 6,700 crore in Apr 2020 to Rs 5,600 crore in May 2020, the lowest in the last five months. 

The overall MF industry’s AUM increased 2.6 per cent MoM to Rs 24.5 lakh crore in May 2020, primarily led by liquid funds (Rs 69,300 crore) and arbitrage funds (Rs 10,600 crore). Contribution of systematic investment plans (SIPs) declined for the second successive month to Rs 8,120 crore (down 3% MoM) after hitting a high of Rs 8,640 crore in Mar 2020. Notably, the contribution of SIPs is now at the same level that it was 11 months back.

Sector, stock allocation highlights

In the month of May 2020 (latest data is available), Motilal Oswal Fund Folio report said that on a month on month (MoM) basis, the weights of consumer, telecom, automobiles, healthcare, cement, technology, metals and utilities increased, while that of private banks, NBFCs, PSU banks, oil and gas and retail moderated.

Defensives’ weight increased 220bp MoM to hit an all-time high of 35.5 per cent. All sectors showed MoM increase in weights. Consumer’s weight increased 100bp MoM to 9.8% after moderating in the previous month. The sector has climbed back to the second position in the allocation of mutual funds. Telecom’s weight increased for the seventh successive month (+80bp MoM, +220bp YoY) to hit an all-time high of 3.9%. “Participation in the Rs 8,400 crore stake sale by Bharti Airtel promoters led to a sharp up move in telecom weights in MF portfolios (about 37% of the deal taken up by MFs),” as per Emkay MF Tracker - May 20 report.

Private banks’ weight hit 20-month low to 16.7% (-130bp MoM, -300bp YoY). Importantly, in sectoral allocation of funds, Technology, NBFCs and Oil and Gas appear under-owned.

Experts said that there was also buying in NBFC, IT services and pharma. Equity funds continue to trim positions in banks, oil & gas, capital goods and FMCG. IT services remains the highest UW (Under-Weight) position, while Cap goods are the biggest OW (Over-Weight).

Sector weights

In May 2020, MFs showed interest in consumer, telecom, automobiles, healthcare, cement, technology, metals and utilities, which led to MoM increase in their weights. Private banks, NBFCs, PSU banks, oil & gas and retail saw MoM decrease in weights.

Private banking (16.7%) was the top sector holding for MFs in May 2020, followed by consumer (9.8%), technology (8.9%) and oil and gas (8.8%).

Financials, retail, infrastructure, real estate, oil and gas and capital goods witnessed decline in value MoM.

Top sectors where ownership of mutual funds vis-à-vis BSE-200 is at least one per cent lower: technology (18 funds under-owned), NBFCs (18 funds under-owned), oil and gas (17 funds under-owned), consumer (16 funds under-owned) and private banks (13 funds under-owned).

Top sectors where ownership of mutual funds vis-à-vis BSE-200 is at least one per cent higher: healthcare (14 funds over-owned), capital goods (14 funds over-owned), cement (9 funds over-owned), telecom (9 funds over-owned) and automobiles (7 funds over-owned).

Stock talk

In may 2020, stocks exhibiting maximum increase in value MoM were HUL, Bharti Airtel, ITC, Aurobindo Pharma and Cipla. In terms of value decline MoM, 8 of the top-10 stocks were from Financials: ICICI Bank, SBI, Axis Bank, HDFC Bank, HDFC, Bajaj Finance, Kotak Mahindra Bank and PFC.

In May 2020, stocks that saw maximum increase in value MoM were HUL, Bharti Airtel, ITC, Aurobindo Pharma, Cipla, M&M, UltraTech Cement, Britannia Industries, Wipro and Dr Reddy’s Labs.

In terms of fund-category wise buying & selling, large-cap funds sold heavily into banks, with ICICI Bank, SBI, Axis Bank, HDFC Bank and Kotak Bank being five of the top 10 most sold stocks. Mid-cap funds bought Balkrishna Industries, HUL and Coromandel International and they sold Cholamandalam Investment and Finance, Jubilant Foodworks and Aarti Industries Ltd.

Let us take a detailed look at what all largecap funds, midcap funds and multicap funds did in May 2020 in terms of stock action.

Largecap funds: The top-10 buys were Bharti Airtel, HUL, ITC, Cipla, Eicher Motors, Asian Paints, Bharti Infratel, Hindalco, Britannia, and Colgate-Palmolive. The top-10 sells were ICICI Bank, HDFC, SBI, Axis Bank, HDFC Bank, RIL, Kotak Bank, HPCL, Bajaj Finserv and Bajaj Finance.

Midcap funds: The top-10 buys were Balkrishna Industries, HUL, Coromandel International, Ramco Cements, Mphasis, Bayer CropScience, Jindal Steel and Power, Alembic Pharma, Aurobindo Pharma and ICICI Bank. The top 10 sells were Cholamandalam Investment, Jubilant Foodworks, Aarti Industries, City Union Bank, AU Small Finance Bank, Cholamandalam Financial, Bajaj Finance, LIC Housing Finance, Ipca Labs and Trent.

Multicaps funds: The top-10 buys were Bharti Airtel, HUL, ITC, UltraTech Cement, Britannia, PGCIL, Dr Reddys, Ambuja Cements, Aurobindo Pharma, and Bharti Infratel. The top 10 sells were Axis Bank, ICICI Bank, SBI, HDFC Bank, Bajaj Finance, Infosys, HDFC, AU Small Finance Bank, Kotak Bank and RIL.

According to ICICIDirect MF Activity report, across AMCs the smallcap stocks that were bought heavily included Indian Energy Exchange, Laurus Labs, Avanti Feeds, E.I.D. Parry (India), Jubilant Life Sciences, Radico Khaitan, Prince Pipes & Fittings, Tata Elxsi, TCI Express and JM Financial. The top 10 smallcap stock sells across AMCs include Majesco, Chennai Petroleum Corporation (CPCL), Healthcare Global Enterprises, Gujarat Mineral Development Corporation (GMDC), NCC, Varroc Engineering, Indian Bank, Essel Propack, Cochin Shipyard and Sobha.

Debt date

Equity mutual funds get a lot of attention. But, in terms of asset size, it is actually the debt funds that are bigger. The Covid-19 pandemic has thrown capital markets into a tailspin. The debt market hasn’t been spared. And given the state of these underlying asset classes, even mutual fund investors are edgy. Hold on or let go? Invest more or redeem? The questions are flying thick and fast, especially after the recent shutdown of a few debt mutual fund schemes of a leading fund house (Franklin Templeton).

A CRISIL analysis, however, shows things aren’t all bad. Indeed, dive a little deeper and there are streaks of silver – options among various categories of debt mutual funds that can help ride over the challenges being posed by the pandemic's economic blow.

For all debt investments, credit profiling is par for the course because such securities and their issuers are prone to downgrades and defaults based on the credit trends of the underlying companies. For instance, CRISIL’s analysis since July 2018, just before the IL&FS issue in September that year, shows that as many as 26 companies held by mutual funds have defaulted till February 2020. Another 50 have been downgraded by more than two notches, of which one was downgraded to below investment grade. The damage from the defaults in the mutual fund portfolio has amounted to Rs 17,700 crore because of erosion in market value. The most affected has predictably been the credit risk category, which lost Rs 4,346 crore market value. Among others, medium duration (Rs 2,304 crore) and aggressive hybrid (Rs 1,902 crore) funds have also been affected.

The CRISIL analysis on the credit profiling of debt funds reveals that as of April 2020, 92 per cent of investments in mutual funds were in G-secs, cash and cash equivalents, bank fixed deposits and the top-rated AAA or A1+ categories. Variation can be seen within categories. Barring credit opportunities (37%), medium duration (57%) and dynamic duration (74%) funds, all other debt categories had exposure of at least 85% to these instruments.

Liquidity profiling of invested instruments is as important as credit profiling. Analysis of mutual fund portfolios showed that exposure to G-secs/ Treasury bills (T-bills), the most liquid instruments in the debt market, rose to 15.3% in April after having dipped to 13.8 per cent in March. Further, natural liquidity5 available to funds in the form of maturity of underlying securities also rose; as of April, nearly 31.1 per cent and 37.5 per cent of the portfolio was to mature in the next 60 and 90 days, respectively, as against 17.8 per cent and 33.7 per cent in March. However, a closer introspection of category-wise liquidity profile shows the prevalent variation. Categories such as long duration (95.3%) and banking and PSU (94.6%) funds had the highest allocation to liquid assets (including sovereign papers, and cash and equivalents), while credit risk (25%) and medium duration (51%) had the lowest exposure to such issuers.

There are, however, scheme-specific exceptions within categories. For instance, within long duration and banking and PSU funds, there were schemes with liquid assets as low as 88.9% and 71.0%, respectively, while among credit risk and medium duration funds, there were schemes with 87.8% and 100.0% exposure to liquid assets, respectively. This variation in category and schemes speaks volumes of the pivotal role played by scheme selection in investment planning.

The writer is a journalist with 14 years of experience

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