Tapering inflows into mutual funds since the beginning of the calendar year 2016 were in line with the BSE mid-cap index correcting close to 9% in the same period, as retail investors who drive fund flows are known to be more attuned to the mid-cap space.
Fund managers expect mutual fund inflows to slow further — for the month of January Rs 2,500-3,000 crore of buying is expected, compared with an average monthly flow of Rs 8,000 crore in CY15 — and the performance of mid-cap stocks may remain under pressure.
The sectoral index for mid-cap companies outperformed the benchmark indices in the calendar year 2015. The BSE mid-cap index gained nearly 10% during 2015 even as the benchmark Sensex declined 5%. Ten of the mid-cap index constituent companies yielded more than 40% returns in 2015. Bajaj Finance and Ashok Leyland were among the best performers in the index as their shares jumped nearly 70% during 2015.
This outperformance led to steep increase in valuations of mid-cap shares. The one year forward valuations of the BSE mid-cap index touched its life-time high of 27 times by the end of December, Bloomberg data showed.
Although the forward valuations of mid-cap index have fallen to 18.64 times currently, they are still higher than the forward valuations of the Sensex, which is 16.75 times, data showed.
“Valuations of mid-cap companies have turned expensive in recent times. Hence, there is a clear case to take money out of mid-cap funds to dynamic asset allocation or large-cap funds,” said S Naren, chief investment officer at ICICI Prudential AMC.
The rally of mid-cap stocks is not surprising considering inflows witnessed by mutual funds in the last two years, market participants said.
During CY15, mutual funds witnessed net inflows of Rs 96,000 crore – the highest in a decade.
Increased fund allocation by insurance companies as well as mutual fund players was the key reason behind renewed buying by domestic institutional investors (DIIs) in the equity markets during the previous calendar. DIIs purchased equities to a tune of Rs 70,000 crore — the highest net buying ever by domestic funds, Bloomberg data showed.