MFs investing in larger number stocks than before amid volatility

Equity schemes now invest in 842 listed companies

Mutual funds are investing in a larger number of stocks than before, a surge in new additions which have come in after the recent volatility.

The industry invested in a total of 824 companies across the listed universe as of October 2021, according to tracker primemfdatabase.com. The S&P BSE Sensex hit its all-time high of 62,245.43 in October. The index has since corrected to 57,863.93, currently around 7 per cent below the peak. The number of stocks that mutual funds invest in today is 842. This is the highest in at least 69 months, according to data from primemfdatabase.com

There is also an increase in the pace at which new stocks have been added. The month-on-month change in the total number of stocks has nearly doubled from October (see chart 1).

Mutual funds have seen steady inflows. Equity schemes saw Rs 19,705.27 in net inflows for February, shows data from industry body the Association of Mutual Funds in India.

Foreign portfolio investors have been net sellers. They have been net sellers by Rs 149, 495 crore in since October.  Geopolitical tensions over Russia’s military action in the Ukraine is said to have affected sentiment. There has also been an expectation of central banks reducing the amount of money they had been pumping into the global financial system. This is expected to result in a withdrawal of some of the money that came into emerging markets like India from foreign investors, some of which has already happened.  

The attendant volatility had resulted in a crash in the value of the stake held by many. Mutual funds currently own 7.16 per cent stake in the listed universe, according to primemfdatabase.com. The peak was 8.81 per cent in April 2020 (see chart 2).

There has been a trend of investors coming in with more money during market corrections, rather than buying at a high and exiting when stocks crash, noted a February 24 ‘Mutual Fund Review’ from brokerage and financial services firm ICICI Securities. The report authored by research analyst Sachin Jain noted that this reflects an increased maturity among retail investors and that schemes investing in smaller companies have been popular during this time such as mid-cap and small-cap ones.

“We remain optimistic on the Indian equity market, in general, and believe that from current levels, every dip is a buying opportunity in a staggered manner. Further fall or volatility in the near term cannot be ruled out given heightened uncertainty surrounding the geopolitical conflict… Corporate earnings, which is the ultimate barometer of the market performance, remains on track for a sharp recovery,” it said.  

While lower gross domestic product growth has affected earnings estimates, they are still expected to compound at 22 per cent, according to financial services firm Morgan Stanley India Company’s March 9 ‘Raising Active Positions’ report.

“A new profit cycle is intact, and we expect earnings to compound at 22% annually (24% previously) over the coming two years… a rise in domestic policy rates may bring another bout of volatility beyond geopolitics. Our new Sensex target for Dec-22 is 11% lower and suggests 16% upside from here,” said the report authored by equity strategists Ridham Desai and Nayant Parekh, and equity analysts Sheela Rathi.