Informist, Monday, Sep 18, 2023
By Rajesh Gajra
MUMBAI – Domestic mutual fund houses used the sustained rise in mid-cap indices to book profits in select stocks last month as they saw valuations in this space at peak or near-peak levels, analysts said. However, mutual fund houses remained net buyers of small-cap stocks.
The exposure of mutual fund houses to Nifty Midcap 150 companies declined nearly 1% on month in August. This compares with a 4.2% increase the previous month, analysis of mutual fund data shows. The mid-cap index ended August 3.6% up from a month ago, making it the fifth consecutive on-month rise. From March-end till August-end, the index has risen 29.4%.
Brokerage firm Nuvama Institutional Equities said in a report on Sep 15 that mid-cap stocks warranted caution due to above-mean valuations, though it did not see it as a bubble.
Mutual fund houses pared their holdings in mid-cap shares for the second time in six months in August. Before this, there was a 2.8% dip in June.
In August, mutual funds reduced their exposure to 65 mid-cap index companies, up from 57 in July, the analysis showed. During this period, they reduced their exposure the most to GMR Airports Infrastructure Ltd, Patanjali Foods Ltd, Supreme Industries Ltd, Ashok Leyland Ltd, Bharat Heavy Electricals Ltd, and Natco Pharma Ltd. The paring in these stocks ranged from 15% to 40%.
The mid-cap index is the only broad-based one currently, trading at a historical premium over the Nifty 50 on a trailing price-to-earnings basis, Samco Mutual Fund's Chief Investment Officer Umeshkumar Mehta told Informist. The euphoria has led to valuations peaking, and probably fund selling, he said.
The mid-cap index has rallied more than 40% over the past six months "and currently undergoing a healthy retracement", brokerage ICICI Securities said in a report on Sep 18.
The selling in August was notwithstanding a rise in net inflows into dedicated mid-cap funds to 25.12 bln rupees from 16.23 bln rupees in July. As per the Securities and Exchange Board of India's rules, a mid-cap fund needs to invest a minimum of 65% in mid-cap stocks. Most mid-cap funds tend to invest in large-cap stocks after fulfilling the minimum 65% requirement. Multi-cap and flexi-cap funds also hold mid-cap stocks in their portfolios.
IN CONTRAST
Unlike mid-cap stocks, holdings of mutual funds in Nifty Smallcap 250 index companies jumped nearly 10% on month in August, after staying nearly flat in July. Like its mid-cap peer, the Nifty Smallcap 250 index has been rising on month without a break since March-end and recorded a 3.1% rise on month in August.
In the case of shares of large-cap companies, aggregate mutual fund holding went up 2.7% on month in August compared with a 1% increase the previous month. This seemed to be on account of opportunity buying as the Nifty 100 index, which comprises 100 large-cap stocks, declined 2.4% from July end to August-end.
Going forward, analysts are cautious about the valuations of both mid-caps and small-caps and expect fund managers to seriously explore profit-booking opportunities.
Brokerage house Kotak Institutional Equities noted in a strategy report on Sep 11 that many of the new favourite mid- and small-cap stocks of institutional and retail investors are in investment sectors such as capital goods, defence, electronics manufacturing services, railways, real estate, and renewables.
"These stocks have delivered eye-popping returns in the past three-six months...we expect a decent investment cycle, but we are not sure about the quality of many of the stocks, given their historical weak execution and governance track-records," the Nuvama Institutional Equities report added. The brokerage firm said the steep rise in such stocks reflected irrational exuberance of investors. End
Edited by Deepshikha Bhardwaj
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