How MFs churned large caps, mid-caps, and small caps in October 2024

19 Nov 2024 , 09:36 AM

WHY GROSS CHURN MATTERS MORE THAN NET FLOWS

The month of October 2024 saw nearly ₹2.40 Trillion of inflows into Indian mutual funds. In a month when FPIs sold Indian equities worth ₹94,000 Crore, domestic mutual funds and LIC infused close to ₹92,000 Crore into Indian equities; largely neutralizing the FPI selling. For the month of October 2024, domestic equity funds saw net inflows of ₹41,887 Crore. However, the net inflows do not give us a clear picture of how much the mutual fund flows would have impacted equity buying and selling. For that we need to look at the gross purchases and redemptions in equity funds for October 2024. The net inflows into equity funds to the tune of ₹41,887 were comprised of gross purchases of ₹74,727 Crore and gross redemptions of ₹32,840 Crore. It is this total volume of ₹1,07,567 Crore that directly impacts the equity buying and selling in the market by mutual funds. Let us see how the mutual funds churned large cap, mid-cap, and small cap stocks in October 2024.

LARGE CAP STOCKS: HOW MFS CHURNED IN OCTOBER 2024

We will stick to the standard AMFI definition based on market cap rankings to delineate large cap, mid cap, and small cap stocks. As per the AMFI methodology, firstly the combined universe of listed stocks on NSE and BSE are ranked descending on market capitalization, with the exchange selection based on the higher volumes. From this list, the top-100 stocks by market capitalization are classified as large cap stocks. This list is reviewed by AMFI twice a year to ensure definitions are current. Here are the major large cap stocks that the Indian mutual funds bought and sold in the month of October 2024.

Let us start with the mutual fund large cap buys first! Overall, the mutual funds added 1,243 lakh shares of Punjab National Bank (PNB), 320 lakh shares of Bharat Heavy Electricals Ltd (BHEL), 281 lakh shares of Ambuja Cements Ltd, 232 lakh shares of Mahindra & Mahindra, 214 lakh shares of IndusInd Bank, 51 lakh shares of Havells Ltd, 46 lakh shares of JSW Energy Ltd,  46 lakh shares of Adani Enterprises, 41 lakh shares of Torrent Pharma, and 28 lakh shares of Bajaj Auto Ltd. Interestingly, there seems to be a lot of interest among mutual funds in index stocks like M&M, Bajaj Auto, Adani Enterprises, and IndusInd Bank. There were no sectoral preferences visible, although the mutual fund buying in large caps in October 2024 was essentially spread across BFSI, power, and automobiles.

We now turn to major large cap selling by mutual funds in October 2024. The selling was visible in stocks as part of the larger portfolio restructuring, which is quite normal amidst a sharp correction in the markets. Let us look at the major sell candidates. There was heavy selling of 423 lakh shares in Indian Oil Corporation (IOCL), 77 lakh shares Vedanta Ltd, 49 lakh shares in Cholamandalam Investment & Finance Company, 38 lakh shares in Tata Motors, 32 lakh shares of HCL Technologies, 29 lakh shares of Dr Reddy’s Laboratories and 28 lakh shares in HDFC Life Insurance Company Ltd. These were the major sell candidates. In addition, the month of October 2024 also saw selling in smaller quantities in stocks like Apollo Hospitals, Adani Power, and Adani Energy Solutions. The underlying theme on the sell side appears to be one of using the FPI selling in the market to restructure their portfolios more in favour of the long term India-centric stories.

MID-CAP STOCKS: HOW MFS CHURNED IN OCTOBER 2024

Let us quickly get into the AMFI methodology to classify a stock as mid-caps? Under the AMFI definition, once the top 100 stocks by market cap are classified as large cap stocks as explained earlier, the 101st to 250th ranked stocks by market cap would qualify as the mid-caps. Here are the mid-cap stocks that mutual funds bought and sold in the month of October 2024, showing the churn on both sides.

Let us first focus on mid-cap buying in October 2024. Overall, mutual funds added 1,392 lakh shares of IDFC First Bank, 384 lakh shares of Bank of Maharashtra, 105 lakh shares of Aditya Birla Capital, 103 lakh shares of Marico Ltd, 93 lakh shares of One97 Communications Ltd (Paytm), 59 lakh shares of Poonawalla  Fincorp, 16 lakh shares of BSE Ltd, and 12 lakh shares of KEI Industries Ltd. In addition, the mutual funds also bought smaller quantities of Cochin Shipyards Ltd and Colgate Palmolive India Ltd  in the month of October 2024. The buying was most prominent in beaten down BFSI stocks during the month of October 2024, as well as the stocks like Paytm which offered a play on the Fintech convergence.

We now turn to major mid-cap selling candidates during the month of October 2024. Mutual Funds sold 325 lakh shares of Steel Authority of India Ltd (SAIL), 160 lakh shares of Bandhan Bank Ltd, 32 lakh shares of Torrent Power Ltd, 30 lakh shares of Container Corporation of India (CONCOR), 29 lakh shares of Voltas Ltd, 20 lakh shares of IRCTC Ltd, and 10 lakh shares of Housing & Urban Development Corporation (HUDCO). In addition, the month also smaller quantities of selling in Endurance Technologies, Astral Ltd, and Gujarat Fluorochemicals Ltd. The selling in mid-caps was relatively lighter in October 2024, and that could be largely because most of the fund action was concentrated on the large cap stories. Also, many mutual funds are finding mid-caps to be attractively priced after the correction; as they do not have the beta risks of large caps, nor do they have the business model or client concentration risks that are prominent among the small caps.

SMALL CAP STOCKS: HOW MFS CHURNED IN OCTOBER 2024

We now turn to the small cap stocks and their definition for the purpose of the churn analysis is again adhering to the SEBI definition. On market cap ranking, the stocks ranked 251st and lower are classified as small caps by AMFI. Here is a quick snapshot of key small cap stocks where mutual funds were active in October 2024. Micro caps are normally not included in this list of investable stocks.

In October 2024, mutual funds added 76 lakh shares of Hi Tech Pipes Ltd, 44 lakh shares of R Systems Ltd, 33 lakh shares of Pakka Ltd (fresh buying), 20 lakh shares of India Cements Ltd, 19 lakh shares of Godawari Power & Ispat Ltd, 17 lakh shares of Sundaram Clayton, 13 lakh shares of Epigral Ltd, and 9 lakh shares of Cigniti Technologies Ltd. In addition, mutual funds also purchased smaller quantities of small cap stocks like Marathon NextGen Realty Ltd, and Inox Wiind Energy Ltd in the month of October 2024. Overall, the addition of small caps were quite muted in the month, which is not surprising considering the high level of macro risks pertaining to earnings, FPI flows and the market valuations.

Let us conclude our churn analysis with the small-cap selling in the month of October 2024. Mutual funds sold 449 lakh shares of RBL Bank Ltd, 140 lakh shares of Manappuram Finance Ltd, 51 lakh shares of Orient Cements Ltd, 49 lakh shares of Castrol India Ltd, 16 lakh shares of Flair Writing Products Ltd, 9 lakh shares of Aarti Pharmalabs Ltd and 8 lakh shares each of ITD Cementation India Ltd and MOIL Ltd. In addition, the month of October 2024 also saw mutual funds selling smaller quantities in small cap stocks like Privi Specialty Chemicals Ltd and Tanla Platforms Ltd.

Finally, here are some key takeaways from the buying and selling data of mutual funds in the month of October 2024. The churn appears to be a case of funds taking profits out of the stocks that have rallied sharply and reallocating to the beaten down stocks. That is a logical move, especially when there are growing concerns over earnings and valuations. The Buffett ratio in India has touched 147% against its long term average of 91%, which has triggered the aggressive selling in the large caps. At the same time the rising geopolitical risks in West Asia, the volatility in the Indian currency, uncertainty over oil prices and the aggressive FPI outflows in October have also triggered a rush to safety out of small cap stocks. It remains to be seen if fund managers got their churn story right in October.