MFs invest in fewer companies in June after portfolios hit multi-year high

Drop in number of firms invested in comes even as MFs' overall holding in stock market has been rising

Mutual funds spread their bets across fewer companies in June, after their investment basket grew to its largest size in years in the previous month.

They invested in a total of 838 companies as of June-end, or eight fewer than the 846 names seen in May, shows data from tracker primemfdatabase.com. The May figure of 846 was its highest in at least six years, show records going back to June 2016.

Equity mutual funds collect money from clients and invest it on their behalf in the stock market. They manage Rs 12.9 trillion through such schemes, according to data from industry body Association of Mutual Funds in India (AMFI). The industry manages a total of nearly Rs 37 trillion including debt investments and hybrid schemes, among others.

The fall in the number of companies it is investing in comes even as its overall holding in the stock market has been going up. Mutual fund ownership was at 7.79 per cent in June compared to 7.45 per cent in the previous month. This would indicate that the industry has put more money to work, even as the number of companies it invested in came down, increasing their holdings in fewer firms. The net inflows in pure equity funds was Rs 15,497.76 crore in June, shows AMFI data. The S&P BSE Sensex, whose movements are seen to be broadly representative of how the market is doing, was down 4.6 per cent in June to close at 53,018.94.

Markets have been falling because of tightening global liquidity. Global central banks have been reducing the amount of money available in the global financial system. Foreign portfolio investors have been net sellers in Indian markets by Rs 1.14 trillion so far in 2022-23. This is in addition to the record Rs 1.4 trillion in outflows seen in the previous year.

Sorbh Gupta, Fund Manager-Equity, Quantum Mutual Fund said the first round of selling typically happens in the more liquid names. There are a lot of buyers and sellers for these shares and transactions are easily executed. The next phase often involves a sell-off in the less liquid stocks. Deals can involve deep price cuts since there aren’t as many counterparties, and finding a buyer for a sizable number of shares can be difficult. Gupta said this is a risk one could see playing out going forward, which fund managers would need to guard against by avoiding such stocks.  

“We prefer more liquid names,” he said.  

Liquidity has been coming down. The National Stock Exchange saw shares worth Rs 44,608 crore change hands daily on average in June. This is lower than the Rs 57,677 crore seen in May and the Rs 70,668 crore for June last year.

The sell-off has come despite earnings growth.

Indian companies are likely to see a 30 per cent year-on-year growth in earnings, excluding commodity majors, oils and metals; according to the 11 July Equity Strategy report from global financial services group Jefferies authored by equity analysts Mahesh Nandurkar and Abhinav Sinha.

“A low base and fully reopened economy should drive....earnings growth....Demand outlook and tackling commodity price volatility will be key commentary to watch,” it said.