Why Mutual Funds Love The Next 500

Large-cap mutual funds delivered 26% returns in 2021. In comparison, small-cap funds returned close to 60%. The divergence was partly a result of market shifting focus towards finding hidden gems, stocks not as prominent as large-caps but where potential returns are high. Numbers bear this out. Small-cap schemes have invested a whopping ₹26,648 crore in Fortune India Next 500 stocks. In fact, Next 500 stocks account for one-fourth of their combined portfolio. Overall, open-ended equity mutual funds have invested ₹86,349 crore, or 6.5% of their assets under management (AUM), in these stocks. Equity schemes include large-cap, large- & mid-cap, mid-cap, multi-cap, small-cap, dividend yield, value/contra, focused, sectoral/thematic, ELSS and flexi-cap funds. Multi-cap and mid-cap schemes hold 10% and 9% assets. Let’s dig into stocks that are favourites of mutual funds.

High Stakes

Sona BLW Precision Forgings, which has a market capitalisation of ₹37,800 crore, is the most sought-after stock in mutual fund universe. It had debuted on exchanges in June last year. Prominent schemes with exposure to the auto components manufacturer are Axis Long Term Equity Fund, the largest tax-saving fund with ₹33,800 crore assets, Mirae Asset Emerging Bluechip, the biggest scheme in large- & mid-cap category with ₹22,000 crore assets and SBI Bluechip Fund, the second-largest fund in large-cap category. As on December 31, 2021, the top three mutual fund stakeholders were Axis Mutual Fund, which held slightly over 4% stake in the company, followed by SBI Mutual Fund (3.12%) and Mirae Asset Mutual Fund (2.3%), shows data by Value Research.

Tata group hospitality firm Indian Hotels Company (IHCL) is mutual funds’ second most preferred stock. The biggest mid-cap fund, HDFC Mid-Cap Opportunities, has invested 3% of its funds in the company. IHC reported a consolidated net profit of ₹95.96 crore in third quarter ended December 31, 2021, vis-a-vis a consolidated net loss of ₹133.22 crore in same period of last fiscal. Other schemes with considerable exposure to the company are SBI Flexicap, Nippon India Multi Cap and Nippon India Large Cap. HDFC Mutual Fund held 4.77% in the company, followed by Nippon India Mutual Fund (3.63%) and SBI Mutual Fund (3.16%), as on December 31, 2021.

Next in line is Bata India, held by, among others, the largest open-ended actively managed equity scheme, Kotak Flexicap Fund. Kotak Mahindra Mutual Fund is the largest shareholder in the company among mutual funds with 4.22% stake. The footwear brand’s revenues have touched pre-Covid levels. The recovery is decent but weaker than most discretionary categories. “Some of its key segments (like formals, school-wear) have still not (fully) recovered. While Bata’s focus on premiumisation, brand perception and expanding distribution are steps in the right direction, there will be challenges along the way,” says Aniket Sethi, research analyst, ICICI Securities. Sethi says Bata is likely to be a key beneficiary of improved mobility after Covid-19 third wave as people start attending schools and offices.

Grindwell Norton, which has risen 100% in last one year, is also a favourite of mutual funds. UTI Mutual Fund has 3.37% stake in the abrasives manufacturer. The other two big mutual fund stakeholders are SBI Mutual Fund (3.35% stake) and Sundaram Mutual Fund (2.2%). The company reported 9.3% growth in Q3FY22. But Rahul Modi, research analyst at ICICI Securities, says he has downgraded the stock due to run-up in valuations and near-term headwinds such as rise in input costs.

Another favoured mid-sized stock is retail mall developer Phoenix Mills with a market cap of ₹17,428 crore. ICICI Pru MF held 3.58% stake in the company, followed by UTI Mutual Fund (2.15%) and DSP MF (2%), as on December 31, 2021, according to Value Research. Phoenix is planning to open five malls with around six million square feet space.

Another Next 500 stock with high mutual fund interest is Navin Fluorine International. The biggest small-cap fund, Nippon India Small Cap (assets of ₹18,933 crore), held a significant 2.25% of its portfolio in the chemicals company as on December 31, 2021. The other big mutual fund investor is SBI Small Cap (2.94%). Navin Fluorine has performed exceptionally well with 73% returns in last one year, 85% in last three years and 51% in last five years, according to Morningstar India data.

Next on the list is auto ancillaries company WABCO India. As on December 31, 2021, SBI Mutual Fund, the biggest fund house, held a remarkable 9% of the company’s equity. HDFC Mutual Fund held 2.4%.

Krishna Institute of Medical Sciences, listed less than a year ago, also finds a place on the list. Mirae Asset Mutual Fund, one of the most consistent performers, holds over 7% in the company, followed by Axis Mutual fund (3.8%).

Real estate company Oberoi Realty is also owned by some of the most consistent-performing equity funds such as Kotak Emerging Equity Scheme (2.63% of its portfolio) and Canara Robeco Emerging Equities (1.29%). The company reported doubling of sales bookings in first nine months of FY22 guided by strong demand across projects. Analysts are bullish on the stock. “We continue to give a 20% premium to the current portfolio for being the leader in the premium residential segment,” says Abhishek Lodhiya, lead analyst, Yes Securities.

Linde India, which has delivered over 200% returns in last one year, is also on the list. Nippon India Tax Saver and Nippon India Multi Cap have significant investments in the industrial gases company. Nippon India Mutual Fund held 5.6% of the company’s equity capital as on December 31, 2021.

Best Equity Funds

The best performing mid-cap mutual fund, PGIM India Midcap Opportunities, has invested 3% of its AUM in Timken India, followed by 2.3% in Graphite India. Axis Midcap Fund, the second-best performer in the mid-cap category, has invested in Sona BLW Precision Forgings and Tata Elxsi. These schemes have given best returns in last five years. PGIM India Midcap Opportunities Fund and Axis Midcap Fund, managing ₹4,070 crore and ₹16,835 crore, respectively, have given 22% returns in the time period under consideration. Edelweiss Mid Cap Fund, Invesco India Mid Cap and Kotak Emerging Equity Scheme hold stake in Navin Fluorine International, Craftsman Automation, Krishna Institute of Medical Sciences, Vinati Organics, Oberoi Realty and Bata India.