The bigger signal from the report is that mutual funds are not simply deploying fresh cash across the board. CLSA estimates that the total dry powder available with active funds fell to a record-low 7.3% of active AUM in July, after hybrid funds increased their equity allocation further.
“This depletes the ability of DMFs to absorb large foreign selling,” CLSA said.
TVS Motor, M&M, Hyundai gain weight as autos lead the rotation
Autos were the biggest sector-level beneficiary among the stocks explicitly highlighted by CLSA. The sector’s active weight rose 24 basis points in July, led by a 17-basis-point addition to TVS Motor, 7 basis points to M&M and 3 basis points to Hyundai.
TVS Motor saw the biggest increase among the three and also recorded the largest change in popularity within the Nifty in July, according to CLSA’s portfolio analysis.
The shift is not entirely new. Over the past three months, domestic mutual funds have cut their underweight in autos by 43 basis points, pushing the sector’s active positioning to the 94th percentile of its three-year history.
That also means the trade is becoming crowded.
CLSA puts metals, real estate and retailing at the 91st, 91st and 89th percentiles, respectively, based on their current positioning versus three-year history.
BSE, MCX and Groww emerge as capital-markets beneficiaries
Capital markets were another major area of fresh DMF interest. CLSA says the sector’s active weight increased 21 basis points in July, with BSE gaining 8 basis points, MCX 4 basis points and Groww 3 basis points.
The move comes as domestic investors continue to favour businesses linked to financial-market activity, even while other financial segments have seen selling.
Mutual funds are also favouring metals, defence and retail
The rotation went beyond autos and capital markets. CLSA says metals and defence gained 17 basis points and 11 basis points, respectively, in July.
Retailing gained another 9 basis points, while the share of funds overweight the sector increased by 5.6 percentage points, the sharpest broadening in participation among the sectors tracked by the brokerage.
Defence, retailing, transport and autos have also seen a significant increase in DMF preference over the past few months, according to CLSA.
But mutual funds are cutting some big sectors
The other side of the rotation is just as important.
Domestic mutual funds cut active weights in insurance and capital goods by 19 basis points and 17 basis points, respectively, in July. The decline was driven in part by a 21-basis-point reduction in LIC and Waaree Energies.
Non-bank lenders also saw pressure after a 21-basis-point cut in Shriram Finance, which reduced the sector’s active weight by 11 basis points.
Over three months, capital goods suffered the largest reduction in relative weight at 52 basis points, taking the sector’s positioning to a three-year low.
CLSA also says cement, construction and engineering, and media are at three-year lows on positioning.
Private banks remain popular, but the buying is selective
Private banks continue to attract mutual-fund money, but CLSA says the rotation within the sector has become highly selective.
Over three months, DMFs added 39 basis points to their overweight in private banks. Yet they cut the sector’s active weight by 11 basis points in July.
HDFC Bank and ICICI Bank gained 39 basis points and 23 basis points, respectively, while Axis Bank lost 21 basis points and slipped two places after being the most overweight stock just a month earlier.
That divergence is central to CLSA’s stock-selection framework. The brokerage isn’t simply following the stocks receiving the most money. It is also looking at situations where its analysts remain positive even after mutual funds have reduced exposure.
CLSA flags stocks mutual funds have recently sold
CLSA specifically highlights Axis Bank, Larsen & Toubro, NTPC, ONGC, State Bank of India and Hindalco as stocks its analysts like that could offer an added opportunity because they have seen notable selling recently.
The report also identifies Reliance Industries, Bharti Airtel, HDFC Bank and Adani Ports as out-of-favour large-cap Outperform ideas because domestic mutual funds are materially underweight these names.
Bajaj Finance is another stock CLSA is watching. The brokerage says mutual-fund interest has recently picked up, but positioning remains light.
“While Bajaj Finance has recently seen a pickup in interest, but positioning stays light and it could have more legs,” CLSA said.
Why the cash number matters
The 7.3% figure is perhaps the most important number in the report.
Cash held by pure equity funds remained at 5.2% of AUM in July, still close to record lows. At the same time, hybrid funds reduced their unallocated equity space by 72 basis points to 16.4% of AUM.
Together, those figures pushed total dry powder down 15 basis points month-on-month to 7.3% of active AUM, a fresh three-year low.
That leaves mutual funds with less spare capital to deploy if markets fall sharply or if foreign investors step up selling.
The result is that the next phase of domestic fund activity could increasingly be driven by rotation between existing holdings, rather than a simple increase in overall equity exposure.
Conclusion
CLSA’s July data therefore offers two different signals: TVS Motor, M&M, Hyundai, BSE, MCX and Groww are among the stocks that gained active weight, while several CLSA-preferred names have simultaneously seen selling.
Disclaimer: This story summarises CLSA’s research and reflects its analysis of domestic mutual-fund positioning. It is for informational and journalistic purposes only and does not constitute investment advice or a recommendation to buy, sell or hold any security. Investors should conduct their own research and consult a SEBI-registered investment adviser before making investment decisions.