HDFC-HDFC Bank merger: Higher weight in index may impact large-cap schemes

Weight of combined entity in indices is expected to be about 14%; schemes may have to remain underweight on the stock as the single stock exposure in portfolio has to be capped at 10%

The merger between Housing Development Finance Corp (HDFC) and HDFC Bank may pose a challenge for some mutual fund (MF) schemes. The weight of the combined entity in the benchmark Sensex and Nifty is expected to be around 14 per cent.

This could mean active schemes may have to remain underweight on the stock as the single stock exposure in the portfolio has to be capped at 10 per cent. In addition, individual fund houses could have softer limits that prevent buying a stock above certain thresholds, say 5 per cent or 7.5 per cent of the overall scheme holding.

This means that fund managers do not get the opportunity to participate in the stock’s outperformance if its weighting exceeds 10 per cent.

Experts believe that large-cap schemes, which largely have to focus their investments in the top 100 stocks in terms of market value, might bear the brunt of the higher weighting of HDFC twins. These schemes might underperform the indices unless weighting falls to below or near 10 per cent.

To be sure, a diversified equity scheme typically invests in 45-60 stocks. So, the impact as it currently stands, may not be significant. But a rally in the twins could compound the problem going ahead. Reliance Industries (RIL) is the only other stock at present which has a weighting of more than 10 per cent in the Sensex and the Nifty.

As per December 2021 shareholding data, MFs, including domestic exchange traded funds (ETFs), held 9.41 per cent stake in HDFC and 14.98 per cent in HDFC Bank. At the end of February 2022, the total MF exposure to HDFC and HDFC Bank was Rs 46,000 crore and Rs 1.02 trillion, respectively, as per Value Research Online data.

Top constituents by weightage in Nifty 50
 

	Weight (%)
RIL	11.89
Infosys	9.13
HDFC Bank	8.43
ICICI Bank	6.64
HDFC	5.66