India's Second Largest Mutual Fund Bets Big on ITC. Will it Pay Off?

Have you ever thought about how buying or selling stakes in a company can affect the company's share price, especially when it involves bulk buying and selling?

The price of shares moves due to supply and demand.

Mutual funds, due to their large investments, can have a significant impact on stock prices, both in the short and long term.

In March 2024, ICICI Prudential Mutual Fund bought Rs 58.2 billion (bn) of ITC shares, over two-thirds of total mutual fund purchases in the conglomerate, valued at Rs 85.6 bn.

Before we analyse how the increase in share has impacted its share price, let's understand the possible reasons for the AMC's increase in stake.

Why Did ICICI Prudential Mutual Fund Buy Stake in ITC?

As we mentioned above, as of March 2024, ICICI Prudential Mutual Fund bought Rs 58.2 bn worth of stake in ITC.

While we do not know for sure why the AMC bought stake, here are some potential reasons...

ITC is a diversified conglomerate that operates in various sectors including FMCG, hotels, software, packaging, paperboards, and agriculture.

It is the second most valuable FMCG company in India, after Hindustan Unilever Limited (HUL).

The company's share price recently fell due to below than expected quarterly results, potentially creating a good opportunity to invest.

ITC has opened its 10th 'Peshawari' dining establishment at the Kehnur Hotel in Hyderabad.

The company is also looking to increase its market share in North India with its YiPPee! Noodles brand, which is currently the second most popular noodle brand in India.

Apart from this, it is also paying a healthy dividend payout of 98%, resulting in a dividend yield of 3%. This makes it an attractive option for dividend funds.

Let's have a look at how the stock price has performed versus its benchmark index in past one year.

ITC's stock price has largely underperformed the benchmark BSE Sensex.

It's about time the company wakes up from the underperformance... it's giving strong signals to shareholders anyway.

The company recently announced that it will hold a meeting on June 6, 2024, to approve the proposed scheme of arrangement involving the demerger of ITC Hotels from ITC Limited into a separate listed subsidiary.

As we had mentioned in one of our editorials, ITC will become the second largest listed hotel company by rooms after the merger.

With the increasing demand for travel and tourism, the hotel industry is poised for a phase of strong demand. This will make hotel stocks (including ITC) a lucrative investment opportunity.

How Large Positions Affect a Stock's Price

When a mutual fund or any large buyer decides to add a stock to its portfolio, the stock price tends to increase in proportion to the size of the investment.

This increase in share price is directly related to the quantity being purchased.

When there is an increase in demand for a stock, its price tends to increase, and vice versa.

The impact of mutual fund trading on stock prices can be confusing for those who don't understand the role of institutional investors in the stock market.

Those who can identify this type of activity can use it to turn substantial profits.

A Rational Decision or a Herding Bias?

Sometimes large investments are not based on market fundamentals but are rather a result of institutional herding.

In other words, when one mutual fund buys or sells a security, it is highly likely that others will follow suit, if the security fits their stated investment goals.

Fund managers tend to have a herding bias due to their fear of loss being greater than the desire for reward.

In the case of ITC during March 2024, apart from ICICI Prudential, Nippon, UTI, DSP, Kotak Mahindra, Axis, Aditya Birla, and SBI Mutual Fund also made substantial investments.

In Conclusion

Investing in stocks that domestic institutional investors (DIIs), such as mutual funds, are buying can be an interesting strategy.

This is because DIIs often have access to extensive research and resources, and their investment decisions can reflect a level of confidence in the company's prospects.

However, DIIs have specific objectives or constraints that may not align with individual investors' needs.

This means that blindly following their investments may not be suitable for your portfolio.

Conduct your research, align your investments with your financial goals and risk tolerance, and consider the broader market context.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...