MFs go slow on equities in July; net buying drops to 17-month low

Mutual fund managers were seen going slow with their equity purchases in July, amid the benchmark indices surging to record highs. Equity schemes bought shares worth Rs 40 billion last month - the lowest since February 2017. Net investments were 57 per cent lower than the preceding month's tally of Rs 92 billion and 67 per cent lower than the one-year monthly average of Rs 122 billion. 

Industry experts attribute the drop in equity investments to slowing inflows into equity schemes.

Sundeep Sikka, executive director and CEO of Reliance MF, said gross inflows have slowed down as high-networth investors (HNIs), who are more sensitive to market swings and volatility, have been churning their portfolios. 

"In the coming months, with markets touching record highs, we should see this tactical money coming back into the market," Sikka added. 

On Monday, the Sensex and Nifty touched an all-time high of 37,805 points and 11,428 points, respectively. In the last one month, both indices have posted returns of around six per cent each.

Nilesh Shah, managing director of Kotak MF, said besides the month-on-month slowdown in investor inflows, there have been other contributing factors as well.

"We have seen certain MFs selling in secondary markets to participate in HDFC Bank's fund-raising programme in the primary market. Also, certain schemes have sold in cash markets to buy in the futures market, given negative spreads in the latter," Shah said.   

Others say MF schemes that invest in a mix of debt and equities were seen favouring the former, leading to tepid inflows in the secondary market.

"Some slowdown can also be attributed to balanced advantage funds reducing their exposure to equity segment," said Radhika Gupta, CEO of Edelweiss MF.

However, experts say there is no reason for alarm as redemptions remain more or less under check. 

Sikka pointed out that the average monthly redemption in the June quarter was around Rs 190 billion, in-line with the average monthly redemptions seen in FY18. Meanwhile, inflows through systematic investment plans (SIPs) continue to remain steady. 

For instance, Reliance MF's new SIP accounts grew 28 per cent in the June quarter. The inflow tally for the month of July was not yet made public by industry body Association of Mutual Funds in India (Amfi).

With equity investments cooling off a bit, money managers are also seen tweaking their investment strategies. 

In the June quarter, MFs’ ownership of large-caps rose 120 basis points (bps) from the levels they held in the September quarter. 

Meanwhile, ownership levels in mid-caps inched up 90 bps, while those in small-caps reduced 10 bps. However, on an individual basis, several companies in the small-cap universe saw MF holdings come down sharply in the June quarter. For instance, MF holding in Jet Airways and Fortis Healthcare reduced 326 bps and 257 bps, respectively, from the previous quarter.

According to market observers, this change is on account of expensive valuations and markets regulator Sebi's re-categorisation norms. 

While large-caps have done well in recent days, mid- and small-cap stocks remain laggards for the most part. The BSE Midcap index is down 2.4 per cent in last three months, while the BSE Smallcap index is down 6.6 per cent. On the other hand, the blue chip-oriented Sensex has posted gains of seven per cent during the same period.