In a significant shift in the Indian mutual fund landscape, March 2025 saw a flurry of exits from smallcap stocks as several major mutual funds made strategic moves to rebalance their portfolios. According to the Association of Mutual Funds in India (AMFI), companies ranked from the 251st position onwards in terms of market capitalization are classified as smallcap companies. This classification has become crucial as fund managers navigate the complexities of market volatility and changing investor sentiments.
During March, HDFC Mutual Fund completely exited from three stocks: Guj. Ambuja Exp, TVS Supply, and KSB. Similarly, SBI Mutual Fund also made a complete exit from SPARC, Balaji Amines, and Guj. Ambuja Exp. Kotak Mutual Fund mirrored this trend, exiting from the same stocks, while Axis Mutual Fund followed suit with identical exits. Nippon India Mutual Fund also exited from Balaji Amines, Guj. Ambuja Exp, and V I P Inds, indicating a broader trend among fund houses to divest from certain smallcap stocks.
In addition to these exits, Quant Mutual Fund pulled out from Orient Cement, while ICICI Prudential Mutual Fund exited from Guj. Ambuja Exp, TVS Supply, and V I P Inds. Other mutual funds also made complete exits from companies such as Hind. Oil Explor., Puravankara, Balmer Lawrie, Ramky Infra, and Venky's (India) during the same month. This mass exit from smallcap stocks reflects a cautious approach by fund managers amid fluctuating market conditions.
Despite the caution surrounding smallcap investments, the broader mutual fund industry showed resilience, with the Nifty index gaining 6.3% month-on-month in March 2025, marking its best performance since July 2024. This uptick in the market came amid global volatility and fluctuating foreign institutional investor (FII) sentiment, yet domestic investors continued to drive mutual fund growth.
The equity assets under management (AUM) of mutual funds surged by 26% year-on-year to reach Rs 32.3 trillion in FY25, propelled by several key factors. These include a 65% year-on-year rise in gross sales of equity schemes, which totaled Rs 9.4 trillion, and a record net inflow of Rs 4.76 trillion, more than doubling the previous year’s figures. The total industry AUM soared to Rs 65.7 trillion, marking a 23% increase year-on-year and the fifth consecutive year of expansion.
Systematic Investment Plans (SIPs), a preferred route for retail investors, demonstrated resilience despite a marginal month-on-month dip. Contributions in March 2025 amounted to Rs 259.3 billion, which, while slightly lower than the previous month, represented a robust 34.5% increase year-on-year, as reported by Motilal Oswal.
Fund managers have been actively rebalancing their portfolios in FY25, with a noticeable shift in sector allocations. Defensive sectors such as Telecom and Healthcare gained traction, with Healthcare moving up to become the fourth-largest holding by weight at 7.6%. Private Banks surged to the top slot with an 18.4% share, while PSU Banks saw their allocation decline to 2.8%.
Domestic cyclicals, which include sectors like Insurance, Real Estate, and Infrastructure, increased their weight to 61.5%. Conversely, global cyclicals, especially Oil & Gas, experienced reduced allocations. In March alone, fund managers increased their exposure to Capital Goods, Utilities, Oil & Gas, Cement, and Insurance, signaling confidence in India’s domestic growth story.
Among the top 10 asset management companies (AMCs), several funds posted impressive month-on-month growth in equity AUM. Nippon India Mutual Fund led the charge with a 9.6% increase, followed by Axis Mutual Fund at 8.3%, Kotak Mahindra Mutual Fund at 8.0%, DSP Mutual Fund at 7.8%, and UTI Mutual Fund at 7.5%. This growth highlights the competitive nature of the industry and the efforts of these fund houses to attract and retain investors.
Analysis of sector allocations revealed that mutual fund ownership in certain sectors was significantly higher than that of the BSE 200 index. Healthcare, for instance, was over-owned by 17 funds, while Consumer Durables and Chemicals saw 12 and 11 funds over-owning them, respectively. On the flip side, sectors like Consumer, Oil & Gas, and Private Banks were under-owned by 17, 17, and 16 funds, respectively.
In terms of stock performance, the Nifty50 stocks saw the highest month-on-month net buying in March 2025 in Jio Financial (+18%), Tata Consumer (+12.8%), Eternal (+10.2%), and Bajaj Finserv (+7.5%). Similarly, among the Nifty Midcap-100, notable net buying was observed in Yes Bank, HUDCO, IDFC First Bank, Patanjali Foods, and Hindustan Zinc.
The year has witnessed a remarkable change in sector and stock allocation within mutual funds. The weight of defensive sectors improved by 30 basis points to 29.7%, driven by increases in Telecom and Healthcare allocations. Meanwhile, the weight of Domestic Cyclicals also rose by 30 basis points to 61.5%, led by sectors like Private Banks, Retail, Insurance, Real Estate, Infrastructure, and Cement.
Global Cyclicals’ weightage, however, declined by 70 basis points to 8.7%, primarily due to reductions in Oil & Gas investments. Healthcare's weight saw a rise to 7.6%, improving its position to fourth from fifth a year ago, while Technology's weight remained unchanged, albeit with a slight decline of 20 basis points year-on-year to 8.5%. Private Banks experienced a surge in weight to 18.4%, increasing by 150 basis points year-on-year, while PSU Banks faced a decline to 2.8%, down by 60 basis points.
As the mutual fund industry continues to evolve, the data suggests that individual investors may benefit from sticking with SIPs amid ongoing market volatility. Diversifying investments towards domestic cyclicals could also be a prudent strategy, as fund managers express confidence in core growth sectors. Reviewing sector exposure to align with current trends may provide additional advantages for investors navigating this dynamic landscape.
