The NIFTY broke above its previous all time in first week of November 2020 and launched a fresh upmove. The index hit a new record high above 18600 in October 2021 before a spell of moderation. Given the continued buying interest by the mutual funds in local stocks in recent months, it will be prudent to check their investment kitty over a broad period of last one year. We are, therefore taking the quarter ending September 2020 as a starting point and looking at the stocks in the bracket of a market capitalization of more than Rs 500 crore, which were constantly on the radar of local mutual fund managers. In total there are 52 stocks in which the mutual funds increased their holdings every quarter compared to the previous one. It means that these counters saw sustained buying by fund managers over last four quarters even as the broad NIFTY 50 was hitting a series of fresh highs. A wide array of counters adorns the list which is fairly sector agnostic.

There has been an impressive spurt in the Assets managed by the Indian mutual fund industry over the recent years given the sustained inflow of funds from local investors and impressive spurt in the stock market valuations. The total assets under management (AUM) stands at Rs 38.45 lakh crore in November 2021, latest data from the Association of Mutual Funds of India (AMFI) showed. This marks a near 29% jump compared to November 2020. The aum has soared by around 60% in last three years as it stood at Rs 24 lakh crore in November 2018. Equity mutual fund schemes received a net flow of Rs 10,686.77 crore in November, recording a four-month high despite volatile undertone in stock markets. This also marked the eighth consecutive monthly net infusion. This shows net inflows into such schemes nearly doubled from Rs 5,079.16 crore in October. The proportionate share of equity-oriented schemes in total AUM is now 48.0% of the industry assets in November 2021, up from 39.7% in November 2020. Equity schemes have been witnessing a net inflow since March this fiscal year. Before this sustained pick up in interest, equity schemes had consistently witnessed outflows for eight months from July 2020 to February 2021, losing Rs 46,791 crore.

There is a definite logic in following the moves by the large scaled investors like the Mutual Fund houses. A mutual fund is run by Asset Management Company (AMC) which are firms pooling funds from various individual and institutional investors and investing in various financial securities in order to search for better returns. The asset management companies have professional fund managers who manage the investments in a judicious and efficient manner. Every Mutual Fund has a particular investment objective, which the fund manager seeks to achieve in an optimal manner. This objective is at the forefront when the mangers decide on the assets in which the investments can be made. Such a decision involves a meticulous process which is followed to build a fund's portfolio. A lot of emphasis is put on up to date financial research, scenario understanding and judging the various other factors likely to influence the market value of the investments. A specialized set of research analysts help the fund manager in this whole process. The rigorous focus on larger picture before committing to any stock or security make investment decisions taken by mutual funds very special indeed.

There is a reason to believe that the mutual funds will be even more deliberate in executing their investment ideas given the increased regulatory scrutiny. The Securities and Exchange Board of India (SEBI) recently announced that its skin-in-the-game rules would be effective from October 1, 2021. The market regulatory body regulates the Indian capital markets and protects the investor's interests by enforcing specific rules and regulations. The Skin-in-the-game is a term derived from derby racing and is used for new rules. It is also a phrase made popular by the renowned investor and the ‘Oracle of Omaha', Warren Buffet. These regulations were announced by the SEBI vide its circular dated April 28, 2021. SEBI decided that a part of the compensation of the Key Employees of the AMCs shall be paid in the form of units of the schemes. While the SEBI defines who the key employees will be, their compensation by way of MF units will be subject to a lock-in of three years. Currently, many AMCs on their own could be giving ESOPs to their key employees to ensure that they have skin in the game, but SEBI's order has made it mandatory for fund houses to pay a part of the CTC in the form of units.

SEBI said that junior employees, those who are below the age of 35 and are not heads of any department, fund managers and CEOs, must invest 10% of their compensation in units of their MF schemes in the first year. The share will increase to 15% in the second year, and from October 2023, employees must invest 20% of their compensation. The key employees of the asset management companies must invest a minimum of 20% of their gross annual CTC from October 1, 2021. In a nutshell, the key executives will be required to invest in their own schemes. As a result, the Rs 33-trillion domestic mutual fund industry will invest thousands of crores in its schemes. This is a highly critical set of rules and will likely trigger a new era of commitment, transparency and efficiency in domestic mutual fund industry., SEBI expects that getting the designated employees to invest in their schemes will lead to better accountability and therefore improved returns on the investment for mutual fund unit holders too. These regulations effectively mean that a fund manager's interest will align with the mutual fund investors now.

Further, in December 2021, in order to safeguard the interest of mutual fund investors, SEBI decided to mandate trustees of mutual funds to obtain the consent of unitholders when the majority of trustees decide to wind up a scheme. As part of amending the mutual fund regulations, the watchdog will make it mandatory for the funds to follow Indian Accounting Standards (Ind AS) from the 2023-24 financial year onwards. Mutual fund trustees will be required to obtain the consent of the unitholders when the majority of the trustees decide to wind up a scheme or prematurely redeem the units of a close-ended scheme, Sebi said in a release. SEBI's recent regulations have come at an apt time given the sharp spurt in retail investors interest in stock investing. There are 11.16 crore accounts in the mutual fund industry on September 21, of which 90.6% is accounted for by retail investors. Monthly SIP contributions were at new high at Rs 11,004.94 crore in November from Rs 7300 crore in November 2020. This spurt, right in the middle of testing time posed by the pandemic, indicates that such a jump will likely be of enduring nature. SEBI has acted in a very timely manner by bringing these rules and it will prompt much more responsible investing from the fund hoses.

Apart from witnessing consistent increase over the last four quarters, most of these stocks have also seen a generous rise in MF holdings compared to the September 2020 quarter. Poly Medicare has seen MF holdings spurt from 0.01% to 2.39% in this period. When we consider names with double digit MF holdings in September 2021, the most prominent surge has been witnessed in Jamna Auto and Birlasoft, with a jump of 108% and 109%, respectively, in the period. Federal Bank, the stock having maximum MF holding in this list, has also seen a steady increase of 31% in the September 2021 quarter compared to the September 2020 quarter.

Outlook:

The retail investors, looking to diversity their pool of investments for a longer term, are always on the hunt for a prudent balance in risk reward assessment. Many a times, buying stocks continually chased by big money investors like mutual funds turns out to be a wise strategy for such investors. A mutual fund is a collection of professionally selected and managed stocks. For fund management and other services provided by AMCs, they charge a fee to the investors. These expenses are charged proportionately against the assets of the fund and are adjusted in the price of the unit. In our view understanding the risk return trade-offs in stock market investments is the most important part of equity investing. Many retail investors have lost money in share trading because they make poor risk return trade-offs. Mutual funds are managed by professional fund managers who have sufficient expertise and experience in picking the right stocks to get the best risk adjusted returns.

Share prices are highly volatile and can induce the investor to buy or sell in short time periods due to fear or greed. Frequent trading often leads the investor to incur losses. Mutual funds encourage investors to invest over a long time horizon, which is essential to creating wealth. Furthermore, systematic investment plans encourage investors to invest in a disciplined manner to meet their long term financial objectives. Many investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way. This discipline and judiciousness will be practised in a much more rigours and calculated manner by the domestic mutual fund houses as the SEBI's new skin in the game directives become an essential part of the investing narrative. Hence, looking at what the mutual fund managers are actively buying over last one year will provide a very valuable insight into the collective mind of the local mutual fund industry.