Check out which small caps were in the sell zone of mutual funds

The Indian stock market has been in the grip of the bears for the past few weeks as the surprising monetary tightening move by the Indian central bank along with the US Federal Reserve’s rate hike and the continuing spectre of inflation fuelled by price of crude oil has affected investor sentiments.

Even though there has been some buying this week, the market is yet to take a decisive direction. The benchmark indices are now around 10% lower than the recently tested all-time peak.

Many market pundits are seeing a bottom for the slide in prices, but few do consider this as a ‘dead cat bounce’ that may give a false comfort level for investors to pump in cash.

While foreign portfolio investors (FPIs) or foreign institutional investors (FIIs) have been the driver of local bourses historically, mutual funds have become significant too in the last few years given the rush of local liquidity. So much so that the current bull run is largely attributed to the flow of cash into the domestic mutual funds, who have in turn pumped in money into the stock market.

Most local fund managers have been voicing concerns about the state of valuations, quarterly shareholding data shows they cut stake in several companies. If we look at their investment strategy last quarter, it appears MFs turned more bearish towards mid-caps compared to larger companies as they cut stake in more mid-caps while snipping their stake in fewer large caps.

One segment of the stock market that is usually seen as a haven for punters looking to make a quick buck with trading opportunities and retail investors who get attracted by lower per share price is the small cap space, or companies with market capitalisation of under Rs 5,000 crore.

This segment tends to have a high beta and tends to swing much more in a volatile market condition. Many investors and analysts try to fish for hidden gems who can be a large cap over the medium to long term.

How MFs behaved in the small-cap space

If we consider the larger firms within the small caps where MFs cut their stake last quarter, at the top of the heap are names like Johnson Controls, NOCIL, Gujarat Pipavav, Vijaya Diagnostic, Rallis India, Nesco, Healthcare Global, Greenlam Industries and Ircon International.

Lower down the order are names like Tata Coffee, Star Cement, Borosil, EIL, Dhani Services, Dhanuka Agritech, Mas Financial, Techno Electric, Bannari Amman Sugars, Railtel, Sequent Scientific, Cosmo Films, JK Tyre and Ahluwalia Contracts.

Gujarat Pipavav Port, Tata Coffee and Nesco were also stocks that mutual fund managers had dumped in the preceding quarter.

Significant sale by MFs in small cap pool

If we track stocks where local fund managers were particularly bearish, we don’t see MFs cutting stake by any significant extent in the small cap space last quarter.

The maximum that MFs snipped their stake in any small cap was limited to around 0.5%. These include companies like RailTel and Matrimony.com.

A notch lower, Johnson Controls, Vijaya Diagnostic, Healthcare Global, Mas Financial, Techno Electric, Mrs. Bectors Food, Wonderla Holidays, Alicon Castalloy, Chemcon Speciality, Rane Holdings, Windlas Biotech and Khadim saw MFs cut stake by 0.4% in the three months ended March 31, 2021.