MF September data shows significant churn in sector and stock allocation; what should investors do?

The mutual fund (MF) industry witnessed a significant churn in the month of September on a month-on-month (MoM) basis.

Data shows on an MoM basis, the weights of technology, healthcare, auto, oil & gas, chemicals and cement increased, while that of banks, utilities, telecom, NBFCs, capital goods, consumer and metals moderated.

As per a report by Motilal Oswal Financial Services, technology's weight increased 140bp MoM to 11.6 percent to climb a new high. Healthcare's weight hit a 55-month high to 8.7 percent (up 70bp MoM and 340bp YoY). Private Bank's weight hit a 29-month low to 15.8 percent (down 150bp MoM and 500bp YoY).

In terms of MoM value increase, 5 of the top-10 stocks were from technology- Infosys (up Rs 4,030 crore), TCS (up Rs 3,290 crore), HCL Tech (up Rs 2,320 crore), Tech Mahindra (up Rs 1,080 crore) and Wipro (up Rs 900 crore), Motilal Oswal said.

Stocks exhibiting a maximum decrease in value MoM were ICICI Bank (down Rs 7,080 crore), Axis Bank (down Rs 4,670 crore), SBI (down Rs 4,170 crore), Bharti Airtel (down Rs 3,890 crore) and Kotak Mahindra Bank (down Rs 3,430 crore), said the brokerage firm.

Read more: Top 30 stocks that mutual funds bought and sold in September

Mutual funds were net sellers in equities in September, in continuation of selling done in the previous three months. In October, so far, also they have continued to sell equities.

In September, the outflow was at Rs 2,595.70 crore as compared to Rs 9,339.02 crore in August, Rs 7,231.99 crore in July and Rs 3,689.67 crore in June, as per the SEBI data.

"We have seen huge outflows in liquid funds which were expected as corporates have to pay the taxes at this time of the year," said Jharna Agarwal, Head, Anand Rathi Preferred.

"Equity and hybrid mutual funds AUMs continue to slide albeit slowly as investors are dipping into their portfolios to make up for loss/reduced incomes. ETFs are emerging as a preferred investment option. In fact, some money which is flowing out of regular equity and the balanced fund could be coming to ETFs," Agarwal added.

Which category of funds should a conservative investor choose?

The economy continues to remain in an uncertain zone.

The International Monetary Fund, in its World Economic Outlook report late on October 13, hinted that India is expected to come out of the COVID-19 pandemic worse placed than not only its peer countries but also some of its neighbours.

As per IMF, Bangladesh is set to beat India in terms of per capita gross domestic product (GDP) in the calendar year 2020.

At this juncture, asset allocation to a suitable category of funds is extremely important as the risk factor is high.

Experts are of the view that a conservative investor should always stick to large-caps and mid-caps.

"A conservative investor should always stick to large-caps and mud-caps, that would be the best thing to continue with," Agarwal of Anand Rathi said.

Harsha Upadhyaya, Chief Investment Officer - Equity, Kotak Mahindra Asset Management Company is of the view that large-cap and multi-cap funds are better choices.

"While in the short-term the scenario is still looking hazy, the expectation is that we will witness gradual recovery over the next few quarters. In this backdrop, conservative investors can look to invest in large-cap or multi-cap funds on a staggered basis," Upadhyaya said.

"The investment period should ideally be at least six-twelve months and investors should hold on to these investments for at least three years,” said Upadhyaya.

Omkeshwar Singh, Head of Rank MF, Samco Securities said that good-quality schemes, irrespective of categories, can be invested.

As per Singh, a couple of filters that needs to be considered while selecting the schemes are:

1. The first filter in whether an investor should invest in a fund or not depends on the quality of the fund itself, evaluate the quality of the portfolio of the schemes i.e. the holding of the schemes where the fund has invested in because it is this portfolio of the scheme that will give returns. This will answer the fund in question “Sahi ya Nahi”

2. Once the first filter is cleared, the second filter of investing is whether a fund has a margin of safety (Simply put - value for money) and therefore should be invested in or not. This will answer if “time to Invest Sahi ya Nahi” for the Fund in question.

The market consolidated in the month of September and bounced back to 12,000 in the first half of October on account of improving high-frequency indicators like PMI, automobiles sales, GST collection, E-way bill, energy demand, etc.

Although we are witnessing a sequential recovery, most of the indicators are still below pre covid levels.

The US elections are also likely to raise market volatility as well as dollar volatility.

Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities, believes market volatility is likely to provide good opportunities for mid-caps and small-caps.

"The recent spate of IPOs and their success clearly indicates the appetite for mid and smallcap stocks. Our case for two year rolling returns indicates that the market has turned in favour of small and mid-cap stocks which are more reasonably valued and offer greater upside potential," said Chadawar.

"Also, SEBI’s new guidelines on multi-cap funds have clearly tilted the favour in case of mid and small-cap stocks which will keep the space in vogue over the medium-term. On the valuation front, Nifty looks optically expensive but fairly valued beyond the top 10 names. Based on this, at this juncture, we recommend investing any incremental money in multi-cap or mid-cap funds. As these funds are likely to outperform large-caps based on upside potential," Chadawar added.

Analysts interpret the macroeconomic situation of the country from different angles and there is no consensus on investing in a particular type of fund.

A lot depends on an investor's investing goal and risk appetite. Based on these two factors, one can choose a fund that suits her needs. Even though volatility remains a concern, the long-term outlook of the market is positive. This should comfort an investor.