MFs play safe, exposure to top 10 Nifty stocks highest in ten years

ET Intelligence Group: It’s rather lonely at the top. As vast segments of India’s equity markets continue to reel under unremitting pain, mutual funds are gravitating to the top 10 Nifty stocks in a collective dash for safety. The concentration of fund exposure in the biggest Indian stocks, by weight, is at a decade high, pointing to a likely lull in broader economic activity.

An analysis of data collected from Value Research showed that of total investments in Nifty 50 stocks at the end of June, mutual fund investments stand at 58 per cent.

Ten years ago, as global risk assets began to clamber out of the sub-prime sinkhole, this exposure stood at 51 per cent. By contrast, the concentration was 47 per cent three years ago.

One of the key reasons for this concentrated exposure is extreme risk aversion among fund managers. In the Nifty basket, the top ten stocks by weight have shown better financial performance than the remaining 40 stocks.

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Also, their share prices have been less volatile in an otherwise gloomy market. Keeping in mind these factors, fund managers have been focusing on restricting incremental fall in share prices instead of enhancing incremental gains.

Also, the new regulatory definition of large-caps (first top 100 by market capitalisation) has played an important role in determining the purchase behaviour of mutual funds. Given their stable performance both on share price and financials fronts, fund managers have felt constrained only to enhance their exposure in the top ten Nifty companies by weight in the Nifty 50 index.

Historically, higher concentration in top-10 Nifty stocks by mutual funds has often been followed by a customary dilution during which institutional investors shopped around for mid-and-smallcap companies to enhance incremental returns on the invested capital.

But in the present market conditions, experts believe this shift is unlikely. Stretched balance sheets of mid-and-small-sized companies stand in the way of further institutional investment in the riskier pockets of the equities market. They point out that weak demand, unacceptable levels of debt, the NBFC crisis, and uncertainty in recovery of corporate earnings in the immediate future are reasons the traditional dilution in concentration would fail to materialize.


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