How your MFs get affected after HDFC Bank-HDFC merger

As per the diversification norms for equity funds, MF schemes cannot hold more than 10% of the portfolio in an individual stock. After the merger takes effect, the fund having a combined exposure of more than 10% in HDFC Bank and HDFC should reduce it to hold only 10% of the amalgamated entity. The table lists funds with a combined risk of more than 10%.

This Capping Exposure for Mergers HDFC bank Large-cap funds may also underperform against its benchmark. For example, the Nifty 50 index has a 14.09% weightage as of March 31 between HDFC Bank and HDFC together; The merged entity, which will be finalized in about 15-18 months, is expected to carry a similar weightage.

If the stocks of the merged HDFC Bank outperform other companies in the index, active funds with only up to 10% exposure will generate lower returns than the index. Santosh Joseph, Founder and Managing Partner, Germinate Investor Services, LLP, said, “The individual stock limit for active fund managers will be a challenge going forward, as we have a number of stalwarts from the stock market.

He recalls a similar case with the stock of Reliance Industries Ltd. “While the company’s weightage (over 10%) has increased in the Nifty 50 and Sensex indices over the past two years, funds with less exposure to Reliance than the index underperformed as the stock has gained 150 per cent since then. Thus, it is difficult for fund managers to beat the benchmark when a particular stock in the index rises dramatically,” he said.

Having said that, the reverse is also true, if a company with a higher weightage in the index underperforms, funds with less exposure to that company than the index will do better. Can the merged HDFC Bank outperform going forward? It depends on the fundamentals of the company and the factors affecting the stock market. While economy of scale and cost synergies are expected to augur well for the unit, long-term performance depends on the company’s future prospects.

Here comes the role of an active fund manager. “Reducing exposure when the company is not performing well, but being flexible to add it when it is doing well and timing of calls is the day-to-day functioning of portfolio managers,” Joseph said.

index fund

When it comes to investing in the large-cap space, experts say that passive index funds are better than actively managed funds as the former will have no stock selection and weight selection.

“It is a no-brainer for an investor to switch to an index fund for large-cap exposure,” said Anish Teli, managing partner, QED Capital Advisors LLP. He said the expense ratio is a drag for active mutual funds. He said that actively managed large-cap funds lost their sheen after it was mandated to use a total return index (TRI) instead of a price return index to benchmark their performance. “Also, post SEBI’s reclassification, large-cap funds are compulsorily to invest 80% of their assets in large-cap stocks. These funds now opt for strategic or short-term calls to boost their returns. And are not able to pick up stocks from the small-cap space,” he said.