During the market correction in March, triggered by regulatory warnings, mutual funds cautiously raised their holdings by small quantities in midcap and smallcap stocks.
Out of the 127 midcap firms, where mutual funds are invested, 69 saw a rise in stakes by mutual funds, while their holding reduced in the remaining 58 stocks. The mutual funds invested Rs 100 crore to Rs 865 crore in 19 midcap stocks, while 29 stocks attracted Rs 10-99 crore in March, according to ACE equities data.
In the smallcap segment, mutual funds have stakes in around 720 firms. Their holdings reduced in 192 firms and increased in 451, while 77 stocks had no change in MF stakes in March. Mutual fund investments ranged from Rs 100 crore to Rs 665 crore in 20 smallcaps, while it stood at Rs 10-99 crore in 125 stocks.
The BSE MidCap fell 0.1 percent and the BSE SmallCap index lost 4.7 percent in March, driven by a combination of factors such as ED raids on a big market operator and allied entities, Sebi flagging 'froth' in the market and asking mutual fund trustees to be watchful of flows into small and midcap segments, and commissioning of a liquidity stress test that has spread fears of unwinding by mutual funds to 'look good' on this count.
Market participants too became fearful that the Reserve Bank of India might attempt to rein in the money flowing into the stock markets.
In the midcap sphere, Samvardhana Motherson International led with MF purchases of Rs 856 crore, followed by Steel Authority of India with around Rs 853 crore, and Canara Bank with Rs 604 crore. Samvardhana Motherson International saw a significant increase of 7.32 crore shares after a major block deal in March brought MF holdings to 90.33 crore shares from 83.01 crore a month before. SAIL saw MFs increasing shares by 6.35 crore, while Canara Bank recorded purchase of 1.04 crore shares by MFs.
Shriram Finance saw the biggest selling by mutual funds in the midcap space at Rs 514 crore, followed by Lupin and PB Fintech at Rs 515 crore and Rs 469 crore. Jindal Steel and Power, Cummins India and Tata Communications saw selling by mutual funds between Rs 300 crore and Rs 400 crore.
In the smallcap space, NLC India saw biggest buying interest from MFs after the government diluted its stake through an offer-for-sale. They bought around 2.92 crore shares worth Rs 665 crore. Other firms such as Prestige Estate Projects, Suven Pharmaceuticals and GR Infraprojects saw MFs raising their stakes by Rs 405 crore, Rs 282 crore and Rs 262 crore, respectively.
Bata India was the biggest smallcap stock which saw selling of around Rs 276 crore by MFs, followed by Bharat Dynamics and Hindustan Copper at Rs 193 crore and Rs 178 crore.
Several analysts have cautioned investors to stay away from the midcap and smallcap stocks for now and, instead, focus on quality stocks only. Anirudh Garg, founder and fund manager at Invasset PMS, in a recent Moneycontrol interview said that both midcap and smallcap segments were overvalued, and urged investors to tread cautiously.
Varun Lohchab, head of institutional research at HDFC Securities, echoed him in an interaction with Moneycontrol, stating that there's froth in the broader market even after the March corrections, especially in smallcaps. He anticipates a further slide in smallcaps as these stocks are trading above their fundamentals. Lohchab also suggests that another correction wave might bring smallcaps to a more reasonable level.
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