What MF holdings are saying about future of equity markets

The Indian equity markets are showing signs of nervousness at higher levels. The BSE Sensex, after touching its all-time high of 38989 in the last week of August, is down by almost 5% and is few points away from breaking the important psychological level of 37000. Is this a normal correction or is the market expecting the cut to be even deeper? So, what are the inflows into equity funds and holdings of the mutual funds say about the current thinking of fund managers?

Although the overall AUM of the domestic MF industry has crossed another milestone in 2018 (Rs 25 lakh crore), the inflows have moderated in the last five months. Inflows into the equity funds, including arbitrage and ELSS, have contributed to only 25% of growth in overall AUMs. However, its share is more than 30% of total AUM.

Apart from the fall in the growth of equity AUMs, what is also painting a grim picture about the future of the equity market is the change in the holdings of the equity mutual funds. The weight of defensive stocks has increased to its 29-month high and is currently at 28% higher by 100 bps on a monthly basis. What led to such a rise was an increase in the weights of technology, consumer, healthcare and utilities.  The tech stocks' weight in the overall AUM has increased to a 20-month high of 8.7%, an increase of 40 basis points sequentially. The healthcare sector during the same period saw an increase in weight by a similar percentage and is at 10-month high.

While the defensives are increasing their share, cyclicals are touching new lows. The weight of cyclicals touched a new low of 61.8 per cent in the month of August 2018, down by 110 basis points sequentially.

Therefore, a careful analysis of the holdings of the mutual fund shows that the fund managers are cautious at the higher levels and are playing safe.