MFs raise equity bets as valuations improve; fund houses invest Rs 55k cr

Cash levels decline, equity allocation rises in balanced advantage funds in March

Mutual fund (MF) houses have been on an equity buying spree in the past three months as they have invested a net amount of Rs 55,000 crore in them between January and March 2023. The number is more than double the amount deployed in the preceding three months (October to December), signalling improved valuations and favourable economic indicators

The valuations, which had peaked in October 2021, returned to its long-term average in March 2023. The 12-month trailing price to earnings ratio (PE ratio) of Nifty50 declined to 21 last month from a high of 32 at the end of September 2021.

Owing to the consistent buying, cash levels at certain fund houses declined last month.

"Equity market valuations are more reasonable today than in March last year. As a result, we have lowered the cash component across most of our schemes. Despite the prevailing global uncertainty, India is better placed, owing to robust corporate balance sheets, government's focus on creating long-term infrastructure and initiatives to support a revival in manufacturing," said Anish Tawakley, deputy chief investment officer, – equity & head of research, ICICI Prudential AMC.

Data shared by Nuvama Alternative & Quantitative Research shows that the average cash level with fund houses was 4.6 per cent at the end of March with PPFAS MF having the highest cash component at 13 per cent.

Compared to February-end data from a Motilal Oswal report, the cash with PPFAS MF is down one per cent. In the case of PGIM MF, cash component has reduced from 11.5 per cent to 6 per cent.

Also, with equities turning attractive, managers of balanced advantage funds (BAF) shifted the allocation from debt to equities in the last few months. ICICI Prudential BAF, which is the second biggest in the category, is one of the fund houses to do so. At the end of March, the asset management company’s equity allocation stood at a 30-month high of 52 per cent, after rising consistently since touching a low of 30.5 per cent in November 2022.

BAFs managed by Aditya Birla Sun Life MF has also increased the equity exposure to 54 per cent in March 2023 from below 50 per cent in September 2022.

In BAFs, the money manager decides on the debt/equity allocation, based on market conditions.

With the improvement in valuations, there are expectations of equity market seeing an upward momentum later this year. "We continue to believe that the first half (H1) of 2023 will be challenging for Indian equities. However, in H2, we expect a good recovery, supported by moderation in inflation and its positive impact on consumption and corporate profitability," Credit Suisse Wealth Management said in a note.

"In our view, we are closer to the end of the rate hiking cycle. While the global growth slowdown may impact the earnings outlook, we do not expect it to be very material, given our positive view on domestic economic momentum," it added.