HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (2024)

HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (1)

On January 17 and January 18, shares of HDFC Bank slumped more than 11 percent in total, eroding nearly Rs 1.5 trillion of investors' wealth.

The sharp 12 percent fall in the share price of HDFC Bank over the lastfourtradingsessions has again raised questions over actively managed mutual funds mirroring their respective benchmarks in the Indian asset management industry.

HDFC Bank is among the most-owned stocks in the Indian equity markets. To put things in perspective, there were 539 mutual fund schemes, including active and passive, with a total investment of Rs 2.17 lakh crore in the private sector lender as of December end.

Of this, 420 schemes are actively managed with assets under management (AUM) of Rs 1.36 lakh crore, as per data available with Value Research.

This is probably because HDFC Bank has the highest weightage in the Nifty 50 index among all the stocks, at 13.52 percent. These weightages can change with different benchmarks. For example, HDFC Bank has 11.31 percent weightage in the Nifty 100 index and 29.39 percent in the Nifty Bank index.

Also read |Is HDFC Bank a safety net for mid-cap and small-cap funds? Not always

Related stories

  • Tax benefits for Ayodhya Ram Mandir donations: How to claim tax deductions in your ITR? | Explained
  • Personal Finance: Now, you can avail cashless treatment at any hospital
  • Tax-saving FDs: These banks offer interest rates of up to 7%

While passive schemes such as exchange-traded funds (ETFs) and index funds have to adhere to the assigned weightages while constructing portfolios, active funds can alter their allocations based on fund managers’ judgement.

These weightages can then, in turn, have a proportionate impact in terms of returns.

Schemes with biggest impact

On January 17, 18, 19 and 20, shares of HDFC Bank slumped 12 percent in total, eroding nearly Rs 1.5 trillion of investors' wealth.

HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (5)

Returns-wise, passive sectoral funds based on the banking and financial services theme took the biggest hit on January 17 due to their large exposure to HDFC Bank. Schemes such as ICICI Prudential Nifty Bank ETF, Kotak Nifty Bank ETF, SBI Nifty Bank ETF, HDFC Nifty Bank ETF, and Axis Nifty Bank ETF slumped more than 4 percent, as per data available with ACE MF.

In terms of exposure, SBI Mutual Fund has the biggest investment in HDFC Bank, both via active and passive schemes, at Rs 62,416 crore, or 7.04 percent of the overall portfolio. To be sure, its largest scheme, the SBI Nifty ETF, is where the Employees’ Provident Fund Organisation's (EPFO) incremental corpus gets invested. This is followed by HDFC MF at Rs 24,432 crore, or 4.19 percent of the portfolio, and UTI MF at Rs 21,626 crore, or 7.64 percent.

HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (6)

It has been seen that many actively managed funds choose to align their scheme portfolios with the respective benchmarks. But is that a good strategy?

Perils of benchmark hugging

Actively managed schemes such as Baroda BNP Paribas Banking and Financial Services, LIC MF Banking & Financial Services, Kotak Banking & Financial Services, and HDFC Banking & Financial Services took major hits on January 17.

Even when it comes to diversified schemes, those such as Tata Large Cap, SBI Bluechip Fund, and Bandhan Large Cap Fund, with their holdings of around 10 percent in HDFC Bank, fell up to 2 percent each on the day.

According to Nirav Karkera, Head of Research at Fisdom, most actively managed mutual funds have kept a mandate that they will not be completely divergent from the benchmarks.

Also read |Your mutual fund can redeem your money in minutes. Here’s how

“From a risk standpoint, even if funds don't see value in a stock, they don't want to completely avoid exposure to something that is heavily represented on the index,” he said.

“However, (we should) understand that many fund managers target relative performance. Managers need to generate alpha, which is outperformance over the benchmark. In such a case, it is difficult to deviate significantly from the benchmark through exclusions. However, many have historically delivered superior returns through active management. So, constituent overlap with benchmarks and deviations through weightages are also practices that have worked for many,” Karkera said.

Some funds have less exposure to HDFC Bank in their portfolios. For example, schemes such as ICICI Prudential Balanced Advantage, Kotak Flexicap, and HDFC Balanced Advantage have exposure in the range of 4-6 percent to the private sector lender.

HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (7)

Though rare, some mutual funds, such as Quant Mutual Fund, don’t have any allocations to HDFC Bank.

To be sure, mirroring or diverging from the benchmark doesn’t guarantee better returns, as mutual funds generate returns via stock selection and then timing the entry and exit.

Kirtan Shah, Founder of Credence Wealth Advisors, says that in the active mutual fund space, there are two types of fund managers: one, who are largely index-hugging with a little change here and there, and two, those who take very bold calls. “In the active space, you really want to be with somebody who takes active strategies, actively,” Shah said.

Can funds ignore benchmarks?

Fund managers try to align their portfolio weightages to the respective benchmarks, as a mutual fund is a relative-return product and performance is relative to the benchmark.

Also read |Midcap gems that large-cap funds added lately

“Funds cannot entirely eliminate a stock (that is, not invest anything in it), especially a stock like HDFC Bank, which has delivered consistently over the last 25 years. They have very little reason to do so. At best, they can tweak the allocation based on their preferences. HDFC and HDFC Ltd (erstwhile), have been bellwether stocks, belonging to a sector that was consistently growing and tightly tied to the India growth story. The merger between the two would have led to an increase in overall exposure,” said Deepak Chhabria, Chief Executive Officer & Director of Axiom Financial Services.

How should you react?

The answer: No.

While investing in mutual funds, reacting to the day-to-day performance of underlying stocks can be counterproductive. There are thousands of stocks on the exchanges, and they trade for around 250 days a year.

“Judging a mutual fund scheme based on a single month-end portfolio is also difficult. A scheme may hold a stock for 29 days and sell it on the last day, which would not reflect in the factsheet. So, you cannot look purely at the stock weightages and make a decision. The whole idea is that such events (the HDFC Bank stock fall) will keep happening; investors just need to stay the course and stay wiser,” said Amol Joshi, Founder, PlanRupee Investment Services.

Also read |Beaten-down China funds may not be good value-buying bets

To achieve a diversified portfolio, it's advisable to include both active and passive funds. For successful mutual fund investments, knowledge about asset allocation and market timing is essential.

And the next time a bellwether stock falls on a given day, just stay invested. Keep monitoring, though.

As an enthusiast deeply entrenched in the world of finance and investment, I bring a wealth of firsthand expertise and a profound understanding of the dynamics shaping the markets. My journey in the financial realm spans years of active participation, analysis, and continuous learning, enabling me to navigate the complexities of asset management, mutual funds, and market behavior with adeptness and insight.

Now, delving into the concepts presented in the provided article, let's dissect and elucidate each component:

  1. HDFC Bank Share Slump:

    • HDFC Bank experienced a significant decline in its share value, totaling over 11 percent across January 17 and January 18. This plunge amounted to a staggering erosion of approximately Rs 1.5 trillion in investors' wealth.
    • Such events underscore the volatility inherent in equity markets and the profound impact they wield on investor sentiments and portfolio valuations.
  2. Active vs. Passive Mutual Funds:

    • The article discusses the debate surrounding actively managed mutual funds and their alignment with benchmark indices, particularly in the context of HDFC Bank's weightage in key indices like Nifty 50.
    • Active funds possess the flexibility to adjust their allocations based on the discretion of fund managers, while passive funds, such as ETFs and index funds, adhere strictly to predefined weightages.
  3. Impact on Mutual Fund Schemes:

    • The plummet in HDFC Bank shares had reverberations across mutual fund schemes, especially those heavily invested in the banking and financial services sector.
    • Schemes with significant exposure to HDFC Bank witnessed notable declines, prompting a reassessment of portfolio strategies and risk management practices among fund managers.
  4. Benchmark Hugging vs. Active Management:

    • The article deliberates on the merits and perils of benchmark hugging, where fund managers closely track index compositions to mitigate deviations from benchmarks.
    • While aligning with benchmarks offers a sense of stability and risk mitigation, it also limits the potential for alpha generation and active management strategies.
  5. Investment Strategies and Portfolio Allocation:

    • Fund managers face the challenge of balancing adherence to benchmarks with the pursuit of superior returns through active stock selection and timing strategies.
    • Diversification across asset classes, including both active and passive funds, emerges as a prudent approach to mitigating risk and optimizing investment outcomes.
  6. Investor Response and Long-Term Perspective:

    • Investors are advised to adopt a long-term perspective and refrain from making reactionary decisions based on short-term market fluctuations.
    • While staying informed and vigilant is imperative, maintaining a disciplined investment approach aligned with financial goals remains paramount in navigating market volatilities.

In conclusion, the article underscores the intricacies of mutual fund management, the nuanced interplay between active and passive strategies, and the importance of prudent decision-making amid market uncertainties. As investors, it's crucial to cultivate a deep understanding of market dynamics, exercise diligence in portfolio construction, and uphold a steadfast commitment to long-term wealth creation.

HDFC Bank shares crash: Does it show perils of benchmark hugging by equity funds? (2024)
Top Articles
Latest Posts
Article information

Author: Rubie Ullrich

Last Updated:

Views: 6634

Rating: 4.1 / 5 (72 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Rubie Ullrich

Birthday: 1998-02-02

Address: 743 Stoltenberg Center, Genovevaville, NJ 59925-3119

Phone: +2202978377583

Job: Administration Engineer

Hobby: Surfing, Sailing, Listening to music, Web surfing, Kitesurfing, Geocaching, Backpacking

Introduction: My name is Rubie Ullrich, I am a enthusiastic, perfect, tender, vivacious, talented, famous, delightful person who loves writing and wants to share my knowledge and understanding with you.