Thematic funds rake in Rs 70,000 cr in 2024: Manufacturing, infra lead

Even in June 2024, inflows of Rs 22,350 cr (55% of total active flows) were into these funds.

Domestic investors, particularly retail investors, are showing great enthusiasm for sectoral and thematic funds, which have accounted for 42 per cent  of all active mutual fund flows so far this year (CYTD). This trend continued in June 2024, with 55% of total active flows going into these funds at Rs  22,350 crore, according to a report by Elara Capital.  

This trend continues to create big euphoria in select pockets of market (largely in Infrastructure, Power, Manufacturing funds).  Thematic and Sectoral funds have seen inflows of Rs 70,000 crore since the beginning of this year. Almost 28 per cent of these inflows have been taken by Manufacturing funds and 8 per cent by Infrastructure funds. In absolute amount, around Rs 19,500 crore have gone into Manufacturing funds and Rs 5,900 crore into Infrastructure funds.

The mutual fund industry is riding the manufacturing wave as a theme for investment as the country’s manufacturing landscape has been undergoing a  transformation, fuelled by the strategic adoption of the ‘China+1’ strategy, the Government’s PLI scheme, and improving infrastructure, which has helped smoothen last-mile delivery.

The assets under management of manufacturing funds at start of this year was Rs 7,700 crore, which has expanded to Rs 32,200 crore June 2024. Likewise AUM of Infrastructure funds at start of this year was Rs 19,700 crore, which has expanded to Rs 32,300 crore by June 2024.

"Such large inflow, largely in Manufacturing funds, have created abnormal demand for few stocks creating a big price impact," said Sunil Jain of Elara Capital.

The large inflows into Manufacturing funds, in particular, have created a surge in demand for certain stocks within that sector. This has potentially inflated the prices of those stocks.

Conversely, the market share of small-cap funds is declining for the first time since 2021, currently at 16 per cent. Mid-cap funds are showing a steady rise but have not surpassed small-cap share yet. Large-cap funds continue to lose market share, currently sitting at around 11 per cent.

The median cash levels of top-100 actively managed schemes (by AUM) have been declining since June 2023. This trend is similar to cash squeeze cycles observed in previous periods (Jan 2012-Jan 2013 and Jun 2020-Feb 2021).

Historically, these cash squeezes have been followed by market corrections (Jan 2013) or sideways movements (Feb 2021) before renewed inflows.

An interesting observation is the divergence in cash levels between the top-100 and top-10 schemes. While the top-100 shows a squeeze, the top-10 schemes still hold higher cash reserves. This raises a question about whether a cash squeeze in the top-10 schemes might be a leading indicator of a market peak. The current divergence in cash levels is the highest in over a decade.

"In Jan 13 period, we saw a bigger correction in markets once cash squeeze was over. Post Feb’21, markets went into a side ways phase for a few months before the next round of big inflows came back into markets. Currently we are witnessing a divergence in cash levels of top-100 schemes v/s top-10 schemes. Although squeeze has begun in the top-100 schemes, but we continue to see higher median cash levels in top-10 schemes. A question to ponder is whether we will start seeing a squeeze there too before marking a top in the markets? Such divergence in cash levels is highest in more than a decade and sustaining since 2023," said Jain.

Cash levels in Large-cap funds remain low and stable, while Mid-cap cash has dropped further. Small-cap cash shows a decrease but remains higher than 2021 levels.

• Cash levels of Large cap schemes continue to remain on the lower side. Cash has stabilised between 3.3%-3.4% since start of the calendar year.
• Midcap cash dropped further in June 2024 to 3.6% and now closer to 2021 lows. Deployment has been relatively aggressive in this category.
• Small cap cash also saw a sharp drop in Jun’24 to 5.5% but still higher compared to the levels seen in 2021. Most of the cash in this category is held by few larger schemes.
•  Average ticket size of a stock in smallcap scheme is now around Rs 120 crore. This used to be at Rs 70 crore in March 23.
• The average ticket size for stocks within Small-cap schemes has increased significantly, indicating potentially larger investment bets.