What the HDFC-HDFC Bank merger means to mutual fund investors

If the combined entity outperforms the benchmark, active fund managers may find it challenging to outperform the market benchmark Nifty 50

Padmaja Choudhury   /   April 5, 2022

The proposed merging of Housing Development Finance Corporation (HDFC) with HDFC Bank, the housing finance giant and holding company for several HDFC group firms in banking, insurance, and other financial services, may prompt many mutual fund managers to rethink their holdings. 

The HDFC group has announced a 25:42 share swap ratio merger of its home financing company with HDFC Bank. Holders of HDFC shares on the record date will get 1.68 HDFC Bank shares for each HDFC share they own, i.e., shareholders of HDFC will get 42 shares of HDFC Bank for every 25 shares of HDFC Ltd. 

The merger is likely to be completed in roughly 18 months, by Q2/Q3 of FY24, after receiving regulatory clearances from the RBI, stock exchanges, IRDAI, SEBI, CCI, and shareholders of the two firms.

Positive on merger

Fund managers are optimistic about the merger, believing that it would benefit the new organisation, HDFC Bank, in the long run. They think HDFC Ltd will reduce credit costs and lower operational costs to the combined firm following the merger. On the other hand, because the cash reserve ratio and statutory liquidity requirements will apply to the new entity’s entire capital base, margins may impact. Some experts believe that HDFC Bank will benefit from vast economies of scale following the merger.

Current mutual fund holding 

Many equity-oriented mutual fund schemes’ top 10 holdings have included the housing finance powerhouse HDFC and the banking behemoth HDFC Bank, which have helped unitholders generate wealth. According to the data published on Moneycontrol.com from AceMF, the whole mutual fund sector has invested Rs 1,01,784 crore in HDFC Bank and Rs 45,403 crore in HDFC Ltd. Many fund managers have remained to hold these stocks in their portfolios despite market fluctuations, believing in the long-term growth narrative of these firms. 

On February 28, 2022, 454 mutual fund schemes owned HDFC Bank shares worth Rs 1.01 lakh crore, representing 5.35% of the mutual fund industry’s total equity assets. According to ACE MF statistics, 328 mutual fund schemes possess HDFC shares worth Rs 45,403 crore, representing 2.39% of the mutual fund industry’s entire equity assets. HDFC Bank and HDFC are responsible for roughly Rs 1.46 lakh crore in mutual fund investments.

As per moneycontrol.com data, HDFC Bank was bought by 170 mutual fund schemes and sold by 132 schemes, and HDFC was bought by 116 schemes and sold by 116 schemes in the last quarter October-December 2021.   

Effect on Mutual Fund Performance  

Currently, the two companies trade as two different stocks. So, mutual funds invest in both these companies as separate entities. However, after the merger, mutual funds must invest only in one stock.

HDFC Bank and HDFC have 8.43% and 5.66% weight in the Nifty 50 Index, respectively, as of March 31, 2022, for a total of 14.09 percent. 

If the existing weights of the two firms in the Nifty 50 Index are any indication, the merged entity’s weight in the Nifty 50 Index might be over 10%. 

But another interesting aside to this is that if the combined entity outperforms the benchmark, active fund managers may find it challenging to outperform the market benchmark Nifty 50 because diversified mutual fund schemes are not authorised to invest over 10% in individual equities.

Conclusion: 

As the merger of the two HDFC group financial behemoths is still some months away, mutual fund investors have nothing to worry about. The merger is unlikely to result in any change in fundamental attributes. If it leads to any change in the fundamental attributes, investors will be given the option to exit the fund without paying any exit load. 

You may talk to your financial planner or advisor to understand the impact of the merger on your mutual fund scheme.  

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