Betting on IT, pharma: How equity fund managers are handling record fund inflows

Investments into mutual funds via monthly systematic investment plans (SIPs) topped the Rs 25,000-crore mark for the first time in October.

Retail investors who were waiting for a market correction deployed funds heavily last month as equity mutual funds (MFs) saw inflows worth more than Rs 41,500 crore . Fund managers, however, deployed cash gradually.

According to a latest report by Motilal Oswal Financial Services, October saw notable changes in the sector and allocation of funds.

On a monthly basis, the weights of banks (private and public sector units), Capital Goods, Healthcare, Technology, and Cement increased, while those of Oil & Gas, Consumer Durables, Automobiles, Consumer, NBFCs, Utilities, Retail, Telecom, and Metals moderated.

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When it comes to retail investors, equity MF inflows surged 22 percent on a monthly basis to Rs 41,887 crore in October across the equity fund segment. So, how are fund managers managing these inflows which are swelling cash levels ?

Record SIP inflows

Investments into MFs via monthly systematic investment plans (SIPs) topped the Rs 25,000-crore mark for the first time in October as investors increased their bets amidst the bearish market trend during the month.

Sanjay Chawla, Chief Investment Officer, Equity, at Baroda BNP Paribas Mutual Fund, said, “All investors who had missed the equity market run have an opportunity to jump on the band wagon. Institutional investors have gradually been deploying cash on a daily basis.”

However, market experts believe that while gross SIP inflows are at record highs, net SIP inflows have been falling over the past few months.

“If you consider the past three months, net SIP inflows are actually coming down. Investors, especially MFs, are also cautious. The number of buyers has come down today in the equity markets,” said Yogesh Patil, Chief Investment Officer of LIC Mutual Fund.

Market correction

According to market experts, valuations are not conducive for fresh buying in a lot of companies.

Equity markets have corrected on a confluence of factors, like unexciting quarterly earnings, US presidential elections, China trying to pump up its economy, state elections in India, and Foreign Portfolio Investor (FPI) selling. All these have led to an equity market correction across the market-cap curve.

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“Earnings growth has not been that great. The quarter that just went by broke a lot of narratives such as India is such a lovely growth market, and that's why we deserve to be in a completely different zone of our own and valuations of global companies don't matter. All those narratives have been broken,” said Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund.

According to Christy Mathai, Fund Manager, Equity, at Quantum Mutual Fund, they have been a bit bearish on the market since June this year.

“The middle of this year itself, we were hitting a lot of sells on a lot of our companies. What you're seeing is that cash has been steadily building over the past few months. If we have a similar correction again, maybe in a month or two, we might deploy that cash,” said Mathai.

Sectoral rotation

Given the market correction, fund managers have been continuously scanning the business environment and trying to pick the right sectors and stocks, given the economic status of the global and Indian economy.

PPFAS Mutual Fund’s Rajeev Thakkar, says, “We've been adding to some names where we find valuations attractive. Largely, the buying would be in private sector banks and some companies like Coal India and Power Grid.”

Quantum Mutual Fund is increasing its exposure to banking. “Financials, especially private sector banking, is where we have dramatically raised the position because we are finding valuations comfortable. Also, we have been moving out of autos,” said Quantum MF’s Mathai.

LIC Mutual Fund’s Patil believes that growth opportunities are available in industrials and power equipment. “We are aligning our portfolio to capex- and manufacturing-driven sectors. We have higher allocation towards capital goods, especially in power sector and some select chemicals and logistics players,” he said.

IT and pharma top picks

Baroda BNP Paribas Mutual Fund likes the IT sector, based on improved US economic conditions and the willingness of corporates to spend after the US presidential elections.

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“We also like the pharma sector for the ensuing business opportunity from the Bio Similar Act and steady domestic opportunity. In the power sector, besides new energy, we like the distribution leg,” said Chawla.

Umesh Kumar Mehta, Chief Investment Officer at Samco Mutual Fund, also said that IT and pharma sectors are getting higher weightage and FMCG and NBFC (non-banking financial companies) stocks are seeing exits.

Edelweiss Mutual Fund, which looks to maintain cash in the range of up to 5 percent at all times, reduced the risk in their portfolio about 3-4 months ago.

“We moved to sectors that are considered defensive. For instance, in the last 3-6 months, we increased our weights in IT (Information technology). We increased our weightage in financial, real estate and consumption sectors. We shed profits from capital goods and defence,” said Trideep Bhattacharya, President and CIO-Equities, Edelweiss MF.

The fund house is now scouting out for opportunities in the cyclical sectors.

While the markets have been going through a lull phase, experts remain bullish on the long-term prospects.

“Given the external factors that have played out, we continue to have faith on India’s economic growth prospects and see a much better second half. I am not of the opinion that we should reduce risk. Since earnings are expected to start showing improvement in the coming quarters, the only question that remains is the money flow. If economic and earnings growth resume their old trajectory, it is just a matter of time before FPI comes back,” said Baroda BNP Paribas Mutual Fund’s Chawla.

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