After a bumper 18-24-month period on the bourses that saw a nearly 40 per cent surge in the benchmark Sensex and multifold returns across multiple stocks, the markets over the past one year have reconciled to a sustained lull. The downturn was triggered primarily by concerns around inflation, rising interest rates across the world, a slowdown in the global economy, and the Russia-Ukraine war. As people search for options to invest in equities, one aspect they can explore is where the large investors, such as mutual funds (MFs), are investing.
A look into the Sebi data on ‘Deployment of funds by all mutual funds’ shows a shift in investments across sectors over the past year.
Where have the MFs reduced holdings?
One sector that has clearly gone out of favour is the IT sector. From accounting for 12.2% or Rs 250,771 crore of industry equity assets under management (AUM) in February 2022, the MF exposure to the software sector now stands at 6.78% or Rs 151,909 crore.
Another sector that has witnessed a dip is consumer non-durables. The MF exposure to the sector came down to 2.94% in February 2023 from 5.93% in the corresponding period last year.
Exposure in pharmaceuticals has fallen from 5.61% to 3.22%.
Market participants say there is a good reason behind this shift.
The consumer non-durable sector could remain under pressure with rising inflation and interest rates, and falling disposable income. The decline in exposure across the pharma sector is on account of waning Covid concerns.
As for the IT sector, it is expected to remain impacted by growth concerns in the US and other European markets, which account for more than 80% of the revenues of Indian leading IT companies. Also, the sector came under fresh pressure this week after TCS and Infosys announced lower-than-expected results. For FY 24, Infosys has given revenue guidance of 4-7%, which is lower than the 16% growth in FY 23. Over the last four trading sessions, shares of Infosys and TCS have fallen by 11.9% and 2.5%. Over the past year, their shares have fallen by 23% and 12.5% respectively.
Analysts believe that IT stocks will continue to be under selling pressure for the next three to four months, due to uncertainty as the US and Europe are facing recession.
Where did MFs raise holdings?
Data shows mutual funds are betting on the infrastructure story of the country, clearly taking a cue from the government’s enhanced focus and the Finance Minister in her recent Budget speech announcing a capital outlay of Rs 10 lakh crore, with focus on roads and highways, railways and defence.
Construction as a sector has witnessed the maximum increase in percentage terms, with the MF industry raising its deployment to 3.33% of its total equity AUM in February 2023, from 1.29% in February 2022.
This is followed by the banking and finance sector. While deployment in the banking sector went up to 21.94% in February from 20.54% a year ago, that in finance went up to 9.32% from 7.21% in the previous year.
The cement sector has also been a beneficiary, as the MFs increased their exposure from 1.03% in February 2022 to 1.73% in February 2023.
Why is it important to see what large investors are doing?
When in doubt, investors should simply follow what the large investors are doing, as they have the due diligence and analysis capability to figure out which sectors or companies may do better in the future.
Institutional investors, who invest large sums of money across sectors and companies within them, employ some of the best financial minds. With a big research and fund management team, they are among the first ones to understand the impact of domestic and global developments. They also have access to the management and understanding of a sector’s growth.
Another key aspect is the scale at which they operate. All the 42 mutual funds have an aggregate AUM of Rs 15.06 lakh crore in equity-oriented schemes. If MFs increase their holding in a sector from 1% to 2%, that would mean additional deployment of Rs 15,000 crore (assuming the share price remained constant). While an additional influx of 15,000 crore in 4-5 key companies in a sector would lead to an immediate rise in the share price of the company, it is important to understand that when institutional investors take a call on a sector, the bet could range from short-term to medium and in some cases even three to five years.
For retail investors, however, investing in equities through mutual funds is better than taking the riskier route of direct stock investing.