The financial year 2020-21 was a good one for the Indian equity market as the benchmark indices gained around 70 percent and broader markets rallied 90 percent-115 percent but mutual funds consistently reduced stake in 160 companies in the first three quarters of the last fiscal.
A drop in shareholding of mutual funds doesn't necessarily mean a weak stock but investors may need to revisit the reasons for holding such stocks and rejig their portfolios if needed, say experts.
As corporates will release shareholding data for the March quarter later this month, we have considered the figures data for the nine-month period ended December 2020 to track mutual funds' holdings.
Of the total 160 stocks, 154 stocks registered double to triple-digit gains in the three quarters, five stocks ended negative and one reported moderate gains.
The top 64 stocks rallied more than 100 percent during the period and CG Power & Industrial Solutions and Intellect Design Arena rose more than 1,000 percent though mutual funds consistently trimmed their shareholding.
The rest 62 stocks, which rallied 100-600 percent during the financial year, included Magma Fincorp, Tejas Networks, Dixon Technologies, Somany Ceramics, Welspun India, IDFC, Tata Chemicals, Motherson Sumi Systems, Sterlite Technologies, SAIL, Lakshmi Machine Works, Grasim Industries, Gravita India, BEML, NBCC (India), Larsen & Toubro Infotech, Tata Steel, Bajaj Finance, PNB Housing Finance, KEC International, Havells India, Tata Consumer Products, Nava Bharat Ventures and IRB Infrastructure Developers.
The consistent reduction in shareholding despite an increase in the stock price as well as the equity market does not mean that mutual funds are bearish on them. They may be shifting focus on better-valued stocks, say experts.
Even the market rally saw changes at the top. In the rally that started after the COVID-19 triggered drawdown in March, IT and pharma stocks were prominent gainers but from the end of September, metals, auto, realty and banking & financials took the lead position.
"Falling shareholding of an MF in the stock may not necessarily mean a weak stock, though in stocks with falling institutional shareholding, investors need to revisit his/her thesis of fundamental validity of holding those stocks," Vineeta Sharma, Head of Research, Narnolia Financial Advisors, said.
"The common trend seen in MF shareholding is that fund managers are favouring growth stock where visibility of earnings in the next two years is high. IT, some industrials and consumer discretionary stock appear to be top favorites of equity fund houses," she added.
Mutual funds have been net sellers in the equity and equity-oriented schemes since July 2020, which indicates that they may have booked profits as FII and retail investors consistently supported the market to take its newer highs amid hopes of economic and earnings growth.
More than Rs 50,000 crore of net outflow has been seen in equity funds since July 2020 and net outflow has been around Rs 10,000 crore per month for the last four months consecutively, Sharma said. This is in contrast to improved wider retail participation in the stock market. So most of the retail investors have put in the market directly instead of using the mutual fund route, she said.
"During the market phase of expansion post-April 2020, mid and small caps have been seen strong performance due to the rising Do It Yourself retail investors. For equity mutual funds while facing redemptions, it is imperative for a fund manager to book profits on some of the stocks," she said.
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