Mutual funds ramp up financial stock buying during March market slump

Mutual funds significantly increased their exposure to financial stocks in March, investing around Rs 55,413 crore even as Indian equity markets experienced a sharp downturn.

The sector accounted for nearly 49 per cent of total mutual fund inflows into the secondary market, where overall purchases stood at approximately Rs 1.13 lakh crore during the month. The buying spree came despite a steep decline in banking and financial shares.

Assets under management (AUM) of mutual funds, however, fell to Rs 46.6 lakh crore in March from Rs 51.29 lakh crore in February, reflecting the broader market correction. Even so, their share of total market capitalisation edged up to 11.3 per cent from 11.1 per cent a month earlier.

Banking and financial indices recorded their sharpest monthly losses since March 2020. The Nifty Bank dropped 17 per cent, while the Nifty Financial Services declined 15.6 per cent.

The pressure on financial stocks was driven largely by a surge in sovereign bond yields, which raised concerns about potential mark-to-market losses on banks’ holdings of government securities. India’s 10-year bond yield climbed more than 37 basis points during the month, crossing the 7 per cent mark and reaching a one-year high.

The rise in yields was attributed to escalating geopolitical tensions, particularly the ongoing conflict involving the United States, Iran and Israel, as well as a spike in crude oil prices that reignited inflation worries. Additional strain came from liquidity tightening, as the Reserve Bank of India intervened in currency markets to support the rupee near record lows.

Beyond financials, mutual funds also channelled funds into other sectors. Consumer discretionary stocks saw inflows of Rs 16,366 crore, followed by telecom at Rs 14,656 crore and information technology at Rs 5,717 crore. Commodities, healthcare and industrials also attracted steady investments, alongside moderate inflows into FMCG and services.

The broader market witnessed a widespread sell-off. Both the BSE Sensex and the Nifty 50 declined 11.5 per cent during March. Mid-cap and small-cap indices also fell sharply, with the BSE MidCap 150 down 10.8 per cent and the BSE SmallCap 250 slipping 10.3 per cent.

In contrast to domestic investors, foreign institutional investors (FIIs) were heavy sellers, offloading equities worth nearly Rs 1.26 lakh crore during the month. Financial stocks bore the brunt of these outflows, with around Rs 60,000 crore worth of shares sold, followed by significant selling in automobiles, construction and metals.

Other sectors such as FMCG, consumer services, real estate and healthcare also witnessed notable FII withdrawals. Overall, foreign investor ownership in Indian equities declined to 15.14 per cent in March from 15.5 per cent in February, while assets under custody dropped to Rs 62.46 lakh crore from Rs 71.78 lakh crore.

The contrasting behaviour between domestic mutual funds and foreign investors highlights a divergence in market outlook, with local institutions stepping in to absorb selling pressure during a period marked by global uncertainty and tightening financial conditions.

With PTI, IANS inputs