MFs use spare cash to hunt for mid-caps

Mutual funds are beginning to bargain-hunt, as smaller stocks are tumbling to new lows. A number of mid-cap and small-cap schemes of MFs, which were sitting on huge cash positions in November 2010, when the Sensex touched an all-time high of 21,000, have begun to deploy this cash in the market.

According to Value Research, a Delhi-based MF research agency, 19 of 21 schemes which took the right call at the peak of the market in November 2010, with 10 per cent or more cash in their portfolio, are now buying.

Reliance Small Cap Fund, which has a corpus of Rs 532 crore, had 55 per cent of this in cash at the end of November 2010. Being a new scheme, the fund remained cautious during the first two months this year. It has since reduced its cash position, to 18 per cent of its portfolio by the end of May. Some of its top positions are ABG Shipyard, FAG Bearings and Take Solutions.

Similarly, ICICI Prudential Dynamic Fund, which had cash of nearly 30 per cent in November, is down to 16 per cent. AIG Infrastructure saw its cash level drop from 25 to 15 per cent.

Other schemes which have seen a drop in cash positions in the past six months include Franklin India, DSP Blackrock Small and Midcap, Quantum Long Term Equity, Reliance Equity and JM Midcap. Axis Midcap Fund, which raised money in February, has also rapidly deployed funds, bringing down cash levels to 32 per cent at the end of May.

In the past six months, while the Sensex lost 15 per cent, the BSE Midcap and BSE Small Cap fell 24.5 per cent and 29.5 per cent, respectively. Some stocks have lost 50 per cent or more. This is creating a number of bargains for fund managers.

“It is very evident. Fund houses have increased exposure in quality mid-cap stocks which were beaten down, irrespective of their fundamentals,” said Gopal Agarwal, head of equities at Mirae Asset Global. “The valuations are good in the mid-cap space and during such a volatile market scenario, people will use the cash available with them to buy more.”

In June, the MF houses were net buyers for Rs 748 crore, adding to the Rs 434 crore they bought in May. This is in sharp contrast to foreign institutional investors, which have been big sellers in the market through the year. “This way, I believe the cash level will deplete completely in these (mid-cap) funds,” Agarwal said.