IMPACT OF HDFC-HDFC BANK MERGER ON MUTUAL FUNDS

The combined weight of the two stocks will be significant in bellwether indices Nifty and Sensex, which will also impact the exposure mutual funds can have in the merged entity

News surrounding the merger of HDFC with HDFC Bank has been received favourably within the investing community. But the merger poses challenges, especially for equity mutual fund managers. One impediment is in schemes where the combined exposure to the two stocks is over 10% of the assets managed by the fund. Mutual funds are permitted a maximum 10% exposure to a single stock to comply with risk management framework stipulated by the regulator.

On March 31, 2022, HDFC Bank had 8.43% weightage and HDFC, 5.66% weightage in the Nifty50 index, taking their combined equity weight to 14.09%. This is well over the mandatory 10% weightage that mutual funds are permitted and will impact many fund schemes. Should investors worry? No. The merger is likely to take 15-18 months, which means adjusting portfolios will be a gradual process. This way, fund managers will be able to pare their portfolios without any knee-jerk reaction.

Active fund managers may have one less stock to choose from for their portfolios. Investors in passive funds like ETFs (exchange traded funds) can worry less as any change in the benchmark indices will be mimicked when the merged entity is included in the index. Actively managed fund portfolios will have time and follow investing opportunities than blindly change their allocations. If you observe any fluctuation in core allocation made by funds you hold, it is more likely to do with this changing scenario.