To find out which were the stocks most wanted by mutual funds, we examined the portfolios of all open-ended equity mutual funds and equity-oriented balanced funds.
The portfolios of all the 268 schemes were aggregated and then sorted on the basis of the value of holdings of individual stocks. This told us which were the most widely held stocks in the portfolios of equity and balanced mutual funds. The top 20 stocks in the list have been analysed in the cover story.
But barring a few outliers (such as Jai Prakash Associates), this list bore a strong resemblance to the Sensex and the Nifty. These largecap blue chips give steady returns to investors year after year. But don't expect them to be multibaggers like some mid-cap and smallcap stocks have been. The mid-cap and small-cap segments have been the most volatile - and often the most rewarding. Value Research goes by a dynamic classification of stocks on the basis of their market capitalisation. The top 70% stocks are classified as large-caps, the next 20% as mid-caps and the bottom 10% as small-caps.
But there were no mid-cap and small-cap stocks in the top 20 stocks owned by mutual funds. So, market capitalisation filters were applied to the universe of stocks held across the 268 schemes. This told us which were the most widely held mid-cap and small-cap stocks in the portfolios of equity and balanced mutual funds.
The sectoral distribution of mutual fund investments is also a good barometer of what's hot and what's not. All the stocks across the 268 mutual fund schemes were classified on the basis of the businesses they were in to find out which were the most preferred sectors and which ones fell from grace.
Closed-ended funds, which have become the latest fad among fund houses, were not considered in the study because they often invest in very long-term bets. Similarly, monthly income plans, which allocate 10-20% of their corpus to equities, were not taken into account for two reasons. One, they have a small exposure to equities. And two, the investment strategy of an MIP is defensive compared to an equity fund. We also kept exchange traded schemes and ULIPs out.
EPS: Earnings per share is an important accounting ratio. It is derived by dividing net profits with the number of shares
PE ratio: Price-earnings ratio is the current price divided by the EPS Basic and Diluted EPS: If new shares are issued, the EPS obviously changes. Diluted EPS takes into account future changes in equity (often caused by the issue of stock options which will be converted in shares at a future date)
PEG: The PEG is a complex ratio derived by dividing the PE ratio by the percentage growth in EPS.
Dividend Yield: The dividend per share expressed as a percentage of the market price of a share. Dividend yield can be compared to debt yields to derive a valuation for a stock.
Stock split: Companies sometimes sub-divide their shares into a larger number with a proportionate reduction of the price. For example, Thermax split each outstanding share priced at Rs 1,475 on 31 March 2006 into 5 shares priced at Rs 311.
Bonus: Companies sometimes issue new equity for “free” to shareholders. A bonus issue also leads to a proportional adjustment in price. For example, Infosys issued one new share for every existing share on 14 July 2006
Price Adjustment: In order to correctly calculate returns, historical prices must be adjusted following any stock split or bonus issue. For example, after Infosys’ 1:1 bonus, an investor who had earlier held one share worth Rs 3,385 then held two shares worth Rs 1,685 each.Any return calculation must reflect that
Target Price: Analysts often make forward estimates of the likely target price. One common valuation method is to project future EPS and assume that the current P E ratio will hold. We have used this method in our essay on large-caps.
Market Capitalisation: Often called “Market Value” — the market capitalisation of a company is the price per share multiplied into the total number of outstanding shares. The market capitalisation of the entire stock market is the sum of the market value of every listed company. In our study, we summed the market value of every listed company in descending order from the largest to the smallest. Here’s how we defined:
Large-Cap: The companies that collectively contributed 70% of total market cap. The average market cap of the top 20 large-caps is over Rs 80,000 crore.
Mid-Cap: The companies that collectively contributed 20% of total market cap. Average market cap of the Top 10 mid-caps was Rs 5,108 crore
Small-Cap: The companies that collectively contributed 10% of total market cap. Average market cap of Top 10 small-caps was Rs 1,050 crore