The share of Nifty 50 companies in the portfolio of individual investors has slipped to a 22-year low of 36.8% as of June 30, according to a report by the National Stock Exchange (NSE). This has been driven by consistent outperformance of the mid-cap and small-cap stocks and the consequent higher inflows that they have managed to attract after the Covid pandemic.
The benchmark Nifty has risen 122% in the last five years, which translates into an average annual return of around 24%. The major broader market indices, however, have soared 250-350% during the same period.
The bumper returns have drawn retail investors towards these stocks directly as well as through mutual funds.
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At 60% as of June 30, the share of Nifty companies in total institutional holdings has also dropped to the lowest since at least March 2001, according to the NSE report.
While the market rally has been fuelled by the robust domestic macroeconomic fundamentals and earnings growth, the pace of the rise has triggered valuation concerns. The fund flows, though, have remained undeterred.
The pure large-cap mutual funds have seen inflows of Rs 5,407 crore in the last one year, against Rs 26,062 crore inflows in mid-cap funds and Rs 38,558 crore in small-cap funds, data from the Association of Mutual Funds in India (Amfi) show.
“Strong re-rating in markets in the last one year may imply that we have borrowed some returns from the future. We find pockets of over-valuation and exuberance, especially in certain lower market capitalisation segments, which are already factoring a good amount of earnings growth along with lofty valuations,” said Vinay Paharia, chief investment officer at PGIM India Mutual Fund.
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Paharia warned that if earnings expectations do not materialise, there is a possibility of multiple de-ratings. Axis Mutual Fund highlighted that after three years of above 20% earnings growth, Indian companies are likely to see a slowdown in FY25 with 15% growth.
“In addition, equity supply has also picked up with stake sales by promoters, private equity and large pipeline of initial public offerings. These could be the likely triggers going forward in addition to the outcome of the US presidential elections and global geopolitics,” the fund house said.
Experts have cautioned that investors likely need to temper their return expectations, and risk-averse individuals should limit their exposure to the mid- and small-cap stocks.