What are investors betting on? MF flows into consumption funds at 4-yr high

Sharp slowdown in Manufacturing, Infra & PSU fund flows, said Elara Securities in a note.

Overall thematic mutual fund flows  have dipped to a five-month low in September, largely influenced by a slowdown in innovation and manufacturing funds—retail enthusiasm is particularly evident in consumption-led sectoral funds, as per data analysed by Elara Securities. 

In September 2024, consumer funds saw the largest inflows since January 2021, led by one large new fund offering, the brokerage said in a note. 

Flows into Consumption funds were languishing since 2021. Finally, Elara Capital saw one large NFO in Sep’24 and flows in the category spiked to highest level in almost 4 years.

Inflows into Sectoral/Thematic Funds in CY24- First outflow from PSU funds since Oct’23.

Although manufacturing, infrastructure, and public sector unit (PSU) funds faced their first redemptions since October 2023, consumption funds surged, capturing investor attention. Inflows into consumption funds touched Rs 5,210 crore, constituting 40% of all thematic and sectoral inflows for the month. This revival is significant as it's the first substantial uptick in consumption flows since early 2021, showcasing the impact of the recent NFO.

PSU fund saw largest redemption since January 221 of Rs 335 crore. Inflows in PSU funds started accelerating since December 2023 and peaked in May 2024. That was a phase of rapid acceleration in PSU stock prices. Now Elara is finally seeing pressure building-up.

Manufacturing fund flows have also been dropping sharply. Peak inflow was in May 2024 after which there is a consistent drop. Sep flows of Rs 389 crore are lowest in this year, said Elara Securities.

Infra fund flows sharply slowed down to Rs 150 crore after averaging at Rs 1,300 crore every month since start of 2024.

Moreover, sectoral and thematic funds  have collectively accounted for a remarkable 44% of active mutual fund flows year-to-date.

Midcap and Small Cap Funds Continue Their Climb

Midcap funds also recorded strong performance, achieving record high inflows for the past two months. September alone saw inflows of Rs 3,130 crore, following a robust Rs 3,055 crore in August. Similarly, small cap funds maintained their momentum with inflows of Rs 3,070 crore in September 2024.

Notably, dividend yield funds are experiencing a resurgence, with inflows reaching an 18-month high of Rs 1,530 crore, indicating growing investor appetite for steady income.

PSU Stock Holding Trend- Average count of PSU in a scheme is dropping rapidly since May 2024

· MFs started aggressively chasing PSU stocks from mid calender year 2023. BSE PSU index cleared its 2008 highs after 15-years in July 2023. "Since the momentum in stock prices post this breakout was rapid, we saw most MFs jumping into the trade a few months later by Oct’23. Inflows into PSU sector funds also started in Sep’23 and picked up rapid pace since Dec’23," noted Elara Securities.

· However, with the slowdown (and now redemption) in PSU sector funds, Elara is  seeing MFs selling PSU stocks. Besides Oil & Gas stocks (where sector flows are still relatively better), most PSU stocks from Manufacturing and Defence funds are witnessing strong supply since May 2024.

Biggest Over/Under Owned Sectors– All the top-10 AMCs turn underweight on FMCG in Sep’24

·         In Sep’24, Elara Securities saw funds increasing their underweight stance on IT by 40bps. This is after consistently reducing the underweight positioning from March 2024 onwards. Biggest increase in underweight was in Infosys. Coforge, Mphasis and Persistent are already overweight but that stance was reduced in September 2024. Only 3 out of top-10 AMCs are now overweight on IT compared to 60% in Aug’24.

·         Like IT, funds also increased their underweight in FMCG from 150bps to 170bps. Biggest increase in underweight was in Colgate & Marico.

"None of the top-10 AMCs are now overweight on FMCG. In Aug’24, we had 4 houses running overweight positioning," said Elara Capital.

Cash Levels in Large Cap and Midcap Schemes

Interestingly, cash levels in large cap schemes have sharply increased, primarily due to four major schemes raising their average cash holdings from 4.9% to 6.2%. This translates to an absolute cash level of  Rs17,700 crore. In contrast, midcap schemes are witnessing aggressive deployment, with cash levels remaining lower than average at  Rs 17,600 crore, said the brokerage.

Small cap cash levels have remained consistent over the past three months, standing at Rs 21,230 crore. Overall, total cash across all equity schemes amounts to Rs1,68,000 crore (approximately $20.8 billion), indicating a strategic approach by fund managers amid market corrections.