Trend: Mid cap shares saw selling by MFs on valuation peak concerns

TREND: Mid cap shares saw selling by MFs on valuation peak concerns

Domestic mutual funds took the sustained rise in mid cap index to book profit in select stocks last month to sell shares in companies from the index and partially book profits, but continued to be on a net buying spree in small cap stocks.

The number of shares held by mutual fund schemes in Nifty Midcap 150 companies declined nearly 1% on month in August, following a 4.2% increase in the previous month, analysis of mutual fund data showed.  The mid cap index ended August 3.6% up on month making it the fifth consecutive time it rose on month. From Mar end to Aug end the index had risen 29.4%.

It indicated a paring of exposure by mutual funds in mid cap stocks which analysts point out was likely selling stocks where valuations were considered to be at peak or near peak levels. Brokerage Nuvama Institutional Equities said in a Sep 15 report that mid cap stocks warranted caution due to above-mean valuations even as it did not see it as a bubble.

The on-month decline in mutual fund holding of mid cap shares in August was the second time in six months. There was a 2.8% dip in June.

In the mid cap selling action in August, mutual funds cut their exposure the most in GMR Airports Infrastructure Ltd, Patanjali Foods Ltd, The Supreme Industries Ltd, Ashok Leyland Ltd, Bharat Heavy Electricals Ltd, and Natco Pharma Ltd. The paring ranged from 15% to 40% in these stocks. In all mutual funds reduced their exposure in 65 mid cap index companies in August, up from 57 in July, the analysis showed.

The mid cap index is the only broad based one currently trading at a historical premium over Nifty 50 on a trailing price to earnings basis, Samco Mutual Fund's chief investment officer, Umeshkumar Mehta told Informist. The euphoria has led to valuations peaking and probably led to fund selling, he said.

The mid cap index has rallied more than 40% over past six months "and currently undergoing a healthy retracement," said brokerage ICICI Securities in a report on Sep 18.

 The August selling action in mid cap index was notwithstanding a rise in net inflow in dedicated midcap funds to 25.12 bln rupees from 16.23 bln rupees in July. As per Securities and Exchange Board of India's rules, a mid cap fund need to invest minimum 65% in mid cap stocks. Most mid cap funds tend to have invest in large cap stocks after fulfilling the minimum 65% condition. Multi cap fund and flexi cap funds also hold mid cap stocks in their portfolios.

 IN CONTRAST

Unlike the trend in mid caps, mutual fund holding in small cap Nifty Small Cap 250 index companies jumped nearly 10% on month in August after staying nearly flat in the previous month. Like it mid cap peer, the Nifty Smallcap 250 index has been rising on month without a break since March end, and in August it recorded a 3.1% rise on month.

 In the case of shares of large cap companies, aggregate mutual fund holding went up 2.7% on month in August as compared to 1% increase in the previous month. This seemed to be on account of opportunity buying as the Nifty 100 index, which comprises of 100 large cap stocks, declined in August ending 2.4% lower than its July end level.

Going forward, analysts are cautious about the valuations in both, mid caps and small caps and expect fund managers to seriously explore profit booking opportunities.

Brokerage Kotak Institutional Equities noted in its strategy report on Sep 11 that many of the new favorite mid-and-small cap stocks of institutional and retail investors are in the investment sectors such as capital goods, defense, electronics manufacturing services, railways, real estate, and renewables.

"These stocks have delivered eye-popping returns in the past 3-6 months… we expect a decent investment cycle, but we are not sure about the quality of many of the stocks given their historical weak execution and governance track-records," the report added. The brokerage attributed the steep increase in such stocks as reflecting irrational exuberance of investors.  End

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