Top 100 stocks get 65 per cent of funds
The trend is almost similar for BSE where 57.5 per cent of the cash market turnover is restricted to top 100 companies.
Mumbai: While there are more than 1,000 companies that are available for trading both on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), a major proportion of tra-ding in the cash market is restricted to just top 100 securities suggesting that a significant chunk of liquidity is chasing just a few quality companies.
These stocks, according to market participants, are responsible for pushing up the valuations of some securities beyond what is warranted by their business fundamentals.
Out of the 1,668 stocks traded on NSE, the latest data available with the Securities and Exchange Board of India (Sebi) shows that top 100 companies accounts for 64.9 per cent of the total cash market turnover.
The trend is almost similar for BSE where 57.5 per cent of the cash market turnover is restricted to top 100 companies. A further analysis of the numbers showed that just 50 stocks accounted for 46 per cent of the cash market turnover in NSE and 43 per cent in BSE.
However experts added that the situation was much worse a decade ago when close to 90 per cent of cash market turnover were confined to top 100 securities.
“One of the main factor is the current state of liquidity in a particular stock that influences institutional investors decision,” said Ambar-eesh Baliga, senior research analyst.
Apart from the growth prospects, he said institutional investors prefer stocks with high free float and where the volume of transactions is high that makes it easier for them to enter and exit with the least impact cost. “So even if there is a quality company in the small and mid cap segment, the low free float and lack of adequate liquidity discourages a fund to make investment. Secondly there is an absence of adequate quality research on small and medium cap companies. Since traded volumes are lower, brokerage houses are also not keen on covering those stocks. So it’s a vicious cycle,” he said.
Ajay Bodke, CEO and chief portfolio manager at Prabhudas Lilladher said that emerging market portfolio funds have a top down investment strategy. “So they prefer large cap liquid stocks where the impact cost is the least. Additionally, the corporate governance standards in the small and mid cap universe is also not that good enough for them to make investments,” he added.