Small-, Mid-Cap Stocks See Mutual Funds Pare Holdings As They Enter Bearish Territory

In a month marked with the largest outflows from Indian equities that foreign portfolio investors have ever made, the benchmark Nifty 50 has recorded its largest pullback from lifetime-high levels in nearly five months.

Even as the benchmark gauges of equities have delivered close to nil returns, fund managers of active equity mutual fund schemes have managed to grow their investors' wealth.

The benchmark of Indian equities comprising of 50 large-cap stocks is close to its July level, effectively delivering 0% returns, if one had invested in a passive fund tracking the index.

Over the same period, 56% actively managed large-cap funds delivered positive returns, beating the benchmark.

While the fall from their respective record-high levels has been sharper, broader market indices, too, delivered nil returns over the same period.

During the same time, 41% of actively managed mid-cap schemes, and 54% of small-cap schemes delivered returns of up to 6.5% and 7.3%, respectively.

As the broad-based bull run in Indian equity markets matures, multiple fund managers and market veterans expect further incline being led by a more narrow range of stocks.

As per conventional market definitions, a 5% decline from the lifetime high levels is considered a 'pullback', with a 10% fall being coined a 'correction', and a 20% decline indicating a 'bearish' phase.

Over a third of the mid cap index constituents currently satisfy the definition of being in a bearish phase, with 64 stocks trading at a 20% or greater discount to their 52-week high levels.

In the small caps, the percentage is even greater, with half of the index constituents recording such a decline.

While over the last year, it has been harder to find stocks that haven't turned multi-baggers, the next leg in Indian equities' bull run is expected to be a stock-picker's market, according to market experts.

In order to beat the benchmark, fund managers of actively managed small and mid-cap schemes also reduced their holdings in such stocks, since the beginning of the second quarter.

Vodafone Idea Ltd. shows the greatest decline in holdings amid mid-cap active equity schemes, with the average decline being of 2%. While, the stock itself fell over 56% from its highest level over the trailing 52-week period.

Amid small-cap stocks with the largest decline from their 52-week high level, Shipping Corporation of India Ltd. saw the most notable decline in average holdings, across actively managed small cap schemes.