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Long term stocks that mutual funds choose

Published : August 3, 2017

Long Term Stock Selection – Tracking Mutual Funds Pick

Long term stock selection – tracking mutual funds pick

Long-term stocks selection is a process which every investor must possess. Among various available methods, studying investment pattern of Mutual Funds in stocks is a passive way to select stocks for the long term. Fund Managers do all kind of due diligence before picking any stock for the schemes which they run. Investment by the mutual fund industry taken together in any company give good cues for companies having long-term growth prospects. The following articles try to explain this.

Long term stocks selection is one of the tedious jobs for any investor. Deciding which share is a good long term buy and which one is not, is not an easy task. The present article suggests one method for selecting shares for long term point of view. We know that mutual funds invest in stocks and that too in bulk. The fund managers do proper due diligence before taking any investment decision. The following paragraph will try to assist a serious investor in his journey of picking right stock for his/her portfolio.

The relevance of mutual funds’ stocks pick for the long term

A mutual fund is a kind of investment program that is funded by unitholders. The funds are professionally managed and pools money from many small and large investors. Such funds run various schemes and are managed by well experienced and trained fund managers. These schemes usually issue units of their funds to the investors in lieu of the invested funds. The schemes, in turn, invest collected funds in various instruments depending on the type of schemes.

The schemes run by mutual funds, can either be equity-focused, debt-focused or a balance of both equity and debt. Nowadays various hybrid funds are also in the market, whose discussion is beyond the scope of the present article. Thus, mutual funds whose schemes invest in Indian stocks are studied for the present article. Before moving deeper into the stocks on which these funds are betting let us look at the following data in next paragraph which advocates the relevance of tracking mutual funds’ investments for picking stocks from mid to long term perspective.

In April 2016 Total Asset Under Management (AUM) of all mutual funds operating in India stands at Rs. 13.91 lac crore. And until March 2016 net fresh investment by these AUM has taken together in Indian stocks amounted to Rs. 1.89 lac crore, which is 13.6% of the total AUM of April 2016. This figure suggests that mutual funds invest the huge amount in Indian stocks and have also invested heavily in the fourth quarter of FY 2015-16 in the Indian stocks.

Why track mutual fund’s holdings of long term stocks?

For answering this let us dig deep into how fund managers pick any stock for schemes administered by them. The sole responsibility and accountability for the performance of the schemes are the fund managers. They then analyze the company under consideration properly which in turn are guided by long-term potential of the stocks. They generally avoid momentum investing in any stocks.

After being satisfied that the stocks under considerations are fundamentally strong with expectations of generating returns higher than that of indices and or other benchmark asset class, the fund’s managers allocate the certain percentage of the collected funds under the scheme for which stock is to purchase. From that allocation of money, for a period of time, say a quarter or two, the managers purchase these stocks from open market bidding at market rates.

Thus, mutual funds managers accumulate functionally strong footings Indian stocks which are available cheap and holds them from long term perspective mainly for capital appreciation. However, fund managers do make mistakes in picking stocks. So tracking individual fund manager’s stock pick is risky. Studying mutual funds consolidated investment in a stock reduces the risk to some extent. The following analysis of quarterly stocks pick by the mutual fund industry has taken together will explain this.

MF poured Rs.188506 Cr in 263 Indian stocks in Q4 FY15-16

In the quarter ending March 2016, mutual funds’ investments taken together amounts to Rs.188506 crore in Indian stocks. Out of over 5000 listed stocks in BSE these fund houses picked 263 companies in which they raised their holdings. This suggests that mutual funds manager who runs various schemes picks stocks after through analyzing them.

These mutual funds had poured cores of rupees in Indian stocks, in the last quarter. They bought stocks of two companies where total investment exceeded Rs. 10,000 crore each. There are 42 such companies where total investment was in between Rs. 1000 crore to Rs. 10000 crore each. About 116 companies have attracted investment in between Rs.100 crore and Rs.1000 crore each. While in 95 companies they bet from Rs.one crore to Rs.100 crore each. There was no such disclosure in n rest of the eight companies.

Comparing investments made in December 2015 with that in March 2016, it was found that in 51 companies the fund managers have raised stake in between 1% and 6 % from that of December 2015 holdings. During the same period, below 1% rise in holding was recorded in rest of 212 companies. In Suprajit Eng, EngineersInd, Shaily Engg, Deepak Nitrite, Genus Power, Westlife Dev, KEI Industries, Redington and Heidelberg Cem, the mutual funds have raised stake above 3% from that of their December 2015 holdings.

About Author

Ankit Goyal
Ankit Goyal

A Finance Professional with over 12 years of experience in Capital Markets & Investment Advisory. Ankit has worked with some of the largest & award winning financial services groups at Regional and National Level. Currently with RMoney, Ankit is a Specialist of Investment Advisory for Equity, Mutual Funds , Insurance, PMS , Fixed Income Products , Structured Products etc, I have managed both Retail, HNIs & Corporates business segments . Ankit loves writing on financial planning, equities, mutual funds & other investment products.

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