How mutual funds prepared to ride out market volatility


Mumbai: Indian mutual fund managers say that they were not caught unawares by the sharp volatility in recent days, but had prepared for it by reducing their exposure to small-cap stocks and moving towards blue-chips.

According to data from ValueResearch, 29 out of 52 multi-cap funds increased their large-cap stocks’ exposure between September and December, while 32 funds reduced their small-cap stock exposure during the same period.

“We have observed fund houses moving to larger sized stocks in the past 3-5 months. For example, we have seen many small-cap funds booking profits in small caps and shifting to mid-cap stocks and mid-cap funds buying nascent large-cap stocks. We also noticed a shift to defensive sectors a quarter ago,” said Vidya Bala, head of mutual fund research at, a mutual fund tracking firm.

Fund managers said this has been part of a conscious plan to avoid overvalued stocks.

“We have been focusing on a few things. We focus on near-term earnings growth. We avoid pockets that come with very aggressive valuation and futuristic valuation. There have been businesses where growth is back-ended and have been under pressure. We have avoided those spaces. For instance, we trimmed our exposure in cement sector. Prices were increasing and in certain pockets, the demand wasn’t picking up,” said Gopal Agarwal, chief investment officer – equities, Tata Asset Management Co. Ltd.

“We have not chased very expensive categories, like some of the private sector banks, despite their weightages increasing in benchmark indices. But we have some low beta companies like utility names related to power sector, oil marketing companies and such companies have worked out well for us,” Agarwal added.

But that doesn’t necessarily mean that fund managers would en-masse avoid small- and mid-cap scrips.

R. Srinivasan, head equity, SBI Funds Management Ltd, said he is still on a lookout for mid- and small-sized companies, even in these markets.

But aren’t such companies expensive?

“Yes, they are. Generally speaking. The real question is, would we buy mid and small caps, now? Yes. For one, mid and small caps are not a homogenous group. Anything that is not large-cap is mid-and-small. That leaves the entire market outside the top 100 stocks (by market capitalisation). The research arbitrage has always been and remains higher in this space. That’s what gives you the excess return. While mid-and-small caps have done well and a number of them are expensive, it is not a challenge to create a non-large-cap portfolio of say, 30 stocks, even in this market,” said Srinivasan.

A few other fund managers have another, albeit smaller, tool to cushion against a market fall—hiking a scheme’s cash levels. However, that strategy has not found many takers. Only 10 of the 36 schemes with a size larger than Rs5,000 crore have increased their cash levels (as a percentage to their overall corpuses) between September and December 2017. Experts said that it’s normal for equity funds, at large, to have a certain portion of cash, and most prefer to be fully invested in equities, at all times.

“Mutual funds in spite of the philosophy of being fully invested typically maintain a cash reserve of 5-10%. Indian fund managers can now use these cash reserves to invest as they have buy opportunities. Their job was a lot harder in the past year or so with such high valuations and limited buy opportunities,” said Kaustubh Belapurkar, director of fund research at Morningstar India.

Some funds like Quantum Long Term Equity Fund, which typically holds larger amounts of cash in rising markets, have chosen to keep their cash levels on the higher side, than their peers. Quantum Long Term Equity Funds, its flagship diversified equity fund, holds around 20% cash as per its December 2017-end portfolio, up from 18% as of June 2017-end.

“We have increased our cash levels in the past six months as we did not see too many buy opportunities. As far as de-risking our portfolio is concerned it was not required in our situation as we have mostly multi-cap funds. Though we have been conscious in our choice, we have selected companies which have strong corporate governance track record. Liquidity is another factor that we have kept in mind,” said Atul Kumar, head-equity funds, Quantum AMC.livemint