What are investors buying now: Uptick in consumption funds, dip in manufacturing, infra, PSU funds

In September 2024, consumer funds experienced a significant increase in inflows, reaching their highest level since January 2021. This surge was predominantly driven by the introduction of new fund offerings, as reported by Elara Securities. 

For the past few years, flows into consumption funds had been stagnating, but this recent development marked a noteworthy change in investor sentiment. The appearance of a sizable new fund offering in September 2024 resulted in a substantial spike in flows within the category, reaching their peak in nearly four years, according to Elara Capital's analysis.

Despite facing their first redemptions since October 2023, manufacturing, infrastructure, and public sector unit (PSU) funds, consumption funds experienced a surge in investor interest. Inflows into consumption funds reached Rs 5,210 crore in the month, making up 40% of all thematic and sectoral inflows. This resurgence is noteworthy as it marks the first significant increase in consumption flows since early 2021, highlighting the impact of the recent NFO.

PSU Funds

The PSU fund experienced its highest redemption since January 2021, totaling Rs 335 crore. Inflows into PSU funds began to increase steadily starting from December 2023 and reached their peak in May 2024. This period witnessed a rapid surge in PSU stock prices. Currently, there is a noticeable build-up of pressure at Elara.

Manufacturing Funds

According to Elara Securities, there has been a notable decline in manufacturing fund flows. The highest inflow was recorded in May 2024, followed by a steady decrease thereafter. The September flows of Rs 389 crore mark the lowest point for this year.

Infra funds

The flow of funds into infrastructure saw a significant decrease to Rs 150 crore, following a consistent average of Rs 1,300 crore per month since the beginning of 2024.

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.

Midcap Funds Performance and Inflows

Midcap funds have demonstrated strong performance, experiencing record high inflows over the past two months. In September, they received inflows of Rs 3,130 crore, following a robust Rs 3,055 crore in August. Similarly, small cap funds continued their momentum with inflows of Rs 3,070 crore in September 2024.

Resurgence of Dividend Yield Funds

Furthermore, dividend yield funds are seeing a resurgence, with inflows reaching an 18-month high of Rs 1,530 crore. This trend indicates a growing investor appetite for steady income.

PSU Stock Holding Trend

Elara Securities observed that mutual funds began actively pursuing PSU stocks from the middle of the calendar year 2023. In July 2023, the BSE PSU index surpassed its highs from 2008 after a 15-year period. Following this breakout, the momentum in stock prices accelerated, prompting most mutual funds to enter the trade a few months later by October 2023. Inflows into PSU sector funds also commenced in September 2023 and gained momentum starting in December 2023.

However, Elara Securities has noticed a slowdown in PSU sector funds, leading to redemptions and subsequently mutual funds selling off PSU stocks. With the exception of Oil & Gas stocks, where sector flows remain relatively stable, most PSU stocks from Manufacturing and Defence funds are experiencing heightened selling pressure since May 2024.

Low on FMCG funds

In September 2024, Elara Securities observed a 40bps increase in funds taking a more cautious stance on the IT sector, reversing a trend of reducing their underweight positioning that began in March 2024. The largest increase in underweight positioning was seen in Infosys, while Coforge, Mphasis, and Persistent had previously been overweight but reduced their stance in September 2024. Currently, only 3 out of the top-10 AMCs are holding an overweight position in IT, down from 60% in August 2024.

Similarly, funds also increased their underweight position in the FMCG sector from 150bps to 170bps, with the biggest increase seen in Colgate and Marico. None of the top-10 AMCs are currently overweight on FMCG, compared to 4 houses holding an overweight position in August 2024, as highlighted by Elara Capital.

Cash levels

Cash holdings in large cap schemes have seen a significant increase, mainly because four major schemes have raised their average cash positions from 4.9% to 6.2%. This equates to a total cash level of Rs 17,700 crore. On the other hand, midcap schemes are actively investing their funds, maintaining cash levels below average at Rs17,600 crore, according to the brokerage.

Small cap schemes have maintained steady cash levels of Rs 21,230 crore over the last three months. In total, the cash reserves across all equity schemes amount to Rs 1.68 lakh crore (approximately $20.8 billion), indicating a strategic approach by fund managers in response to market fluctuations.