With the merger of Housing Development Finance Corporation (HDFC) and HDFC Bank, the portfolios of some of your mutual fund (MF) schemes holding these stocks may see some revision.
As per the diversified norms for equity funds, MF schemes cannot hold more than 10% of the portfolio in an individual stock. Funds having a combined exposure of more than 10% to HDFC Bank and HDFC, must pare it down to hold only 10% of the amalgamated entity, once the merger is effective. The table lists funds with a combined exposure of more than 10%.
This capping exposure to merged HDFC Bank may also result in the underperformance of the large-cap funds against its benchmark. For example, the Nifty 50 index has 14.09% weightage to the HDFC Bank and HDFC together as on 31 March; the merged entity, which will be finalized in about 15-18 months is expected to have a similar weightage.
If the merged HDFC Bank stock outperforms compared to other companies in the index, the active funds with exposure of only up to 10% will generate lower returns than the index. “For active fund managers, the cap on individual stock will be a challenge going forward, as we have more behemoths created out of the stock market,” said Santosh Joseph, founder and managing partner, Germinate Investor Services, LLP.
He recalls a similar case with Reliance Industries Ltd’s stock. “As the company’s weightage in the Nifty 50 and Sensex indices went up (more than 10%) in the last two years, funds having lower exposure to Reliance compared to the index underperformed as the stock went up by 150% since then. Thus, it is going to be difficult for fund managers to beat the benchmark when one particular stock in the index moves up dramatically,” he added.
Having said that, the reverse is also true, if the company having higher weightage in the index underperforms, funds holding lower exposure to that company than the index will be better off. Can the merged HDFC Bank outperform, going ahead? That depends on the fundamentals of the company and factors affecting stock market. While the economies of scale and cost synergies are expected to augur well for the entity, the long-term performance depends on the future prospects of the company.
The role of an active fund manager comes into play here. “Trimming the exposure when the company is not doing well, but being flexible to add it when performing well and timing the calls is the day-to-day functioning of the portfolio managers,” added Joseph.
When it comes to investments in large-cap space, experts say passive index funds are better than actively managed funds as there will be no stock selection and weight selection in the former.
Anish Teli, managing partner of QED Capital Advisors LLP, said, “It is a no-brainer for an investor to go for an index fund for large-cap exposure.” He said the expense ratio is a drag for active mutual funds. He added that the actively managed large-cap funds lost sheen after they are mandated to use the Total Return Index (TRI), rather than the price return index, to benchmark their performance. “Also, after SEBI’s reclassification, large-cap funds mandatorily have to invest 80% of their assets in large-cap stocks. These funds are no longer able to pick stocks from mid and small-cap space for tactical or short-term calls to boost their returns,” he said.
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