Mutual Funds Sahi Hai? With Big Exposure to Sensex Dominoes?

Jul 23, 2018

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This is the third time I'm warning you about the risk that the Sensex dominoes pose. But I must.

I talked about the Sensex dominoes for the first time in November 2017. Well before the markets started showing any signs of correction. And my view that these stocks could take the Sensex to 23,000 levels hasn't changed.

I talked about them again in June 2018, citing the risk to them from macro variables like oil prices, exchange rates, and interest rates.

But it is funny that the mutual funds being aggressively endorsed as 'sahi hai' see no risk in being over exposed to these stocks.

Even as the money coming into mutual funds almost tripled over past four years, they allocated more

to the same big Sensex stocks. An overall allocation of 1-2% of the entire industry's AUM may not seem large.

But, specific large cap funds have as much as 5% of AUM allocated to each of these stocks.

The recent regulatory reclassification of funds, based on market cap, also had a big role to play.

This reminds me of what Howard Marks wrote in his recent memo about the blue chip bubble in the US funds. The scenario in India isn't any different. Be warned dear reader.

The large positions occupied by the top recent performers - with their swollen market caps - mean that as funds attract capital, they have to buy large amounts of these stocks, further fueling their rise. Thus, in the current up-cycle, over-weighted, liquid, large-cap stocks have benefitted from forced buying on the part of passive vehicles, which don't have the option to refrain from buying a stock just because its overpriced.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - When Auditors Are Paid 100 Times the CEO...

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