Fears of global trade wars and rising interest rates seem to weighing down MFs going by their selection of sectors to invest in and stay away from
After seeing net inflows of more than Rs 10,000 crore in April and May, equity mutual funds saw lower inflows at Rs 8,794 crore in June, according to data from the Association of Mutual Funds of India (AMFI). Net inflows into balanced funds fell to their lowest in two years, to Rs 1,482 crore. Balanced funds recorded an inflow of Rs 2,666 crore in May 2018. So what were the specific factors that affected equity MFs in June?
Indian mutual funds were picky in their stock selection during June, preferring to stick to trusted sectors and names against a back drop of changing macro-economic conditions and volatility, both domestic as well as globally.
"Macroeconomic factors, both domestic as well as global, were some of the main factors that ruled the strategies on MF (equity) managers," said Aditya Makharia Head of Research Motilal Oswal AMC.
What mutual funds bought
June saw heavyweights (large-cap stocks) holding the fort, for Nifty, amidst the broader market sell-off. The midcaps and smallcaps traded near to their yearly lows, according to an analysis by Edelweiss.
"The tilt towards quality and growth is quite evident in the investment pattern of domestic institutional investors (like MFs)," said Gaurav Dua, Head of Research, Sharekhan by BNP Paribas.
The most sought after sectors were pharma and IT. "So, broadly, the investment strategy of fund managers was tilted towards defensive and value picks," said Sandip Raichura Head of Retail at Prabhudas Lilladher.
"Do remember that the rupee weakened (against the dollar)," said Makharia. Thus, exports led sectors got a natural fillip. Also the growth in the US economy meant that IT was a favoured pick, as a lot of the sector's outputs goes to the US.
"One big healthcare company got approvals for its plant from US FDA, which was under observation earlier. Some other pharma companies also got product approvals, giving a shot in the arm to their stock prices," said Atul Kumar, Head – Equity Funds Quantum Long Term Equity Fund & Quantum Tax Saving Fund.
As much as Rs 1,000 crore of pharma stocks were picked up by fund managers, while approximately Rs 650 crore was invested in IT stocks, according to an analysis by Prabhudas Lilladher.
"Consumer demand revival is among most preferred investment theme," says Dua.
What mutual funds sold
But MFs also avoided certain sectors. Investments into capital goods, infrastructure, chemicals, cement, utilities, private banks and autos declined in June. "This is the very nature of thematic and cyclical investments," explained Raichura, about these sectors losing flavour. Fund houses began buying into infrastructure stocks on the back of government reforms. However, with the lack of private investments, these sectors are still lagging behind. "Hence, fund houses now seem to be switching to other investment opportunities, with better growth prospects," he added.
Future course of action
What factors will guide fund managers going ahead? "The macro-economic factors especially the trade wars, will be a guiding factor," said Makharia. Higher interest rates in the US will affect Indian equities. Rising crude oil prices would affect the stock markets negatively, if they go up.
Domestically, the progress of the monsoon will affect equity markets, as will the earnings of corporate India. "A disappointment in earnings announcements will lead to a de-rating of stocks," noted Raichura. Hence, fund managers will be keeping a close eye on the ongoing earning season to base their investment strategy for the next couple of months.
"The progress of monsoons, MSP hikes, fiscal policy target maintenance would also be key," said Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.
But there are several takeaways from the experts which the retail investor can use to benefit his/her investment outlook.
"We believe that the corporate earnings are at a cusp of a strong revival and equity returns over the next two to three years would outpace returns from all other asset classes," said Sharekhan's Dua.
"Monsoon data so far points towards a normal rainfall and it has been covering the country well," said Quantum's Kumar. "Given better farm prices with eye on next elections, agriculture sector could also see better prospects," he said.
WHAT FACTORS WILL GUIDE MFS' EQUITY INVESTMENTS:
- Rising interest rates in the US
- Possible trade war
- Crude Oil prices
- Corporate earnings
- The course of the monsoons
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The most sought after sectors were pharma and IT. "So, broadly, the investment strategy of fund managers was tilted towards defensive and value picks," said Sandip Raichura Head of Retail at Prabhudas Lilladher.
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