Seven favourite stocks of mutual funds and why to invest
Updated on 8 Nov 2016
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The stock market has witnessed a lot of volatility over the past one year. Global uncertainties weighed heavy on the market earlier this year, but it bounced back following the passage of key reforms, a healthy monsoon and strong inflows of foreign investments.

However, the healthy uptick in stock prices has taken market valuations pretty high, even as corporate earnings growth has been moderate at best. The appetite for mid- and small-cap stocks, in particular, has been very high, leading to a surge in valuations in certain stocks. Equity fund managers have had to dig deep to find rewarding stocks.

ET have identified seven stocks that mutual fund managers steadily accumulated during the past one year. These are stocks that have seen a consistent rise in mutual fund holdings in the past four quarters.
Why to invest in these stocks
Does it make sense to follow in the footsteps of fund managers and invest in these stocks? The basket of seven stocks we identified last year has given phenomenal returns of 40%. This is 6 percentage points more than the best performing diversified equity fund and 29 percentage points higher than BSE 500. 2014 stock picks have also outperformed the average diversified fund and the BSE 500.

Be ready to stick with these names for 3-5 years. In some cases, investors would also be better off buying on dips-or price corrections-if possible. Lastly, remember that even the most high-conviction bets need to be monitored regularly. If you are patient, this basket of quality stocks can prove rewarding in the long run.

7 Top picks by Mutual funds
How these stocks are selected by ET

1. ET began by restricting the Most Wanted Stocks' study to the BSE 500 universe of stocks.

2. Only 54 stocks were found to have seen a steady rise in mutual funds' holdings over each of the past four quarters.

3. Stocks held by at least 10 diversified equity funds, forming at least 5% of their total share capital, were selected. Only 17 scrips made the cut.

4. Among these, only 10 stocks had an average return on equity in excess of 14% over the past three years.

5. Finally, of the 10 stocks that made the cut, on the basis of analysts' recommendations, the list was finalised to 7 stocks.
Exide Industries
The market leader in the auto batteries segment and a preferred battery suppliers to major OEMs (original equipment manufacturers) in India, Exide Industries is well positioned to benefit from the rising auto demand. The positive impact of a normal monsoon and the Seventh Pay Commission has led to a jump in volumes, owing to increased demand from OEMs.

The replacement demand is also expected to revive by the next year and the industrial battery segment will pick up with the economic recovery. Exide is also likely to be a major beneficiary of the Goods and Services Tax (GST) due to the lower indirect tax rates as well as the shift from unorganised to organised players in the battery replacement market. The price advantage enjoyed by the unorganised players due to tax evasion will erode once GST is enforced.

The company has outlined a capex of Rs 1,400 crore over the next two years to enhance its product mix with high performance and more durable automotive batteries with punch-grid technology. With the introduction of cost-cutting measures and focus on more profitable segments, going forward, Exide is expected to maintain healthy margins.

MF Holding as a % of total share capital -
45 schemes hold the stock
Top 5 funds holding the stock
VOLTAS: Better product mix to sustain high margins
Voltas maintains its dominant position in the domestic air-conditioning market, despite competition from multinatinal companies and local players, because of its wide distribution network, strong product suite and quality after-sales support. The strong demand in the unitary cooling products (UCP) segment is likely to continue during the festive October-December season, supported by rise in discretionary spending.

A better product mix-rising proportion of higher margin split and inverter AC compared to window AC-and lower operating leverage is expected to sustain margins at a healthy level. The company has recently entered the air coolers space, which is a highly underpenetrated segment and will add to the company's margins. Voltas' EMP (electromechanical projects) business, which was underperforming owing to a weak demand environment, slow execution and cost-inefficiencies, has seen healthy order inflows in the past few quarters and is starting to show signs of a recovery.

Analysts expect international awarding activity to improve in the run-up to the Dubai Expo 2020 and Qatar Football World Cup 2022. The company's superior return ratios, clean balance sheet and zero-debt position justify its premium valuations, say analysts.

MF Holding as a % of total share capital
39 schemes hold the stock

Top 5 funds holding the stock

Exide Industries
Voltas
Cholamandalam Invest & Fin Co
PI industries
Finolex Industries
Credit Analysis & Research
Fag Bearings India
Continued .....
Cholamandalam Invest & Fin Co and PI industries
Finolex Industries & Care Research & Fag Bearings India