Mutual funds seem to be defying caution from analysts on midcap and smallcap valuations and raising their stakes.
Around 70 percent of stocks in Nifty MidCap 100 and Nifty SmallCap 100 indices recorded a sequential rise in mutual fund stakes in the December 2023 quarter, according to Ace Equities data.
In 2023, Nifty MidCap100 and Nifty SmallCap100 indices surged over 46 percent and 55.6 percent respectively, while in the December quarter they jumped over 14 percent and 19 percent. And, they have gained 6 percent each so far this year.
In Nifty MidCap 100, Fortis Healthcare had the sharpest rise of 6.55 percent in mutual fund holding to 25.05 percent from 18.49 percent in the previous quarter. Petronet LNG followed with a 5.08 percent increase to 9.92 percent, while Mankind Pharma, Voltas, Apollo Tyres, Aurobindo Pharma, and Bank of India followed with over 3 percent rise in each.
United Breweries Ltd had the 13th straight quarter of sustained rise in mutual fund holdings, Zee Entertainment had nine, eight for Lupin Ltd and Mahindra & Mahindra Financial Services, and seven for Torrent Power Ltd. Biocon, Deepak Nitrite, and Petronet LNG saw the rise for six quarters in a row, Oil India saw five, and Dixon Technologies India, Aurobindo Pharma, and Voltas had four quarters of rise.
In Nifty SmallCap 100, Computer Age Management had the largest increase in mutual fund stake, jumping from 3.78 percent to 11.25 percent in the quarter. Indian Energy Exchange, Granules India, Karur Vysya Bank, and BSE Ltd also experienced stake additions of over 3 percent each in the same period.
Kalyan Jewellers India Ltd recorded mutual fund stake additions for eight consecutive quarters, Affle India Ltd for seven, Jubilant Ingrevia for six, and Bikaji Foods International Ltd, Can Fin Homes Ltd, Firstsource Solutions Ltd, Raymond Ltd, and Metropolis Healthcare Ltd for five consecutive quarters.
Among Nifty MidCap 100 Index, Federal Bank, Persistent Systems, Ashok Leyland, Tata Chemicals and Indian Hotels saw MFs reducing their stake by over 1 percent. In Nifty SmallCap 100 Index, MCX saw MF reducing stake by 4.4 percent, followed by Suzlon Energy Ltd, Natco Pharma and Birlasoft with stake cuts by 3.4 percent, 2.5 percent and 2.2 percent, respectively.
Yogesh Kalwani, InCred Wealth's investments head, in a recent interview with Moneycontrol said he foresees that smallcap and midcap valuations will normalise in the coming year as the market has factored in positives for an eventful year with the Lok Sabha elections and key monetary policy decisions.
He suggests taking profits from smallcap and midcap investments at this juncture due to their sharp rise, driven by liquidity-chasing stocks and recommends reducing allocation to this market segment.
Despite Nifty Midcap and Nifty Smallcap outperforming the Nifty 50 in CY2023, Kalwani highlights the premium of 28 percent and 30 percent that the Midcap and Smallcap indices hold over their respective long-period averages on a one-year forward P/E basis. Looking at the past three calendar years, Smallcap doubled, Midcap rose 1.8x, while Nifty 50 increased by 1.4x, indicating substantial broader market outperformance, he added.
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