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HDFC Bank exposure in Mutual Funds

We have had a good correction in stock prices of Mid & Small cap segments in the last 2 years. When Small cap saw 40% drop in prices and Mid cap had a near 30% drop, Large cap segment which kept the markets up in most part of 2018 have not participated in the weakness. Even now, after more than 20 months of broad correction in our markets, Large cap indices like SENSEX and NIFTY have given back only about 4 to 6%, which is not at all a correction in prices of those stocks.

The present patterns in the indices and the stocks that kept them at high’s are showing signs of weakness. When the turn comes, most of the stocks that lead the rally will give way to weakness in prices. This will have a big downside move, on the funds that hold these giant large cap caps.

Stocks like HDFC Bank have maximum exposure in many Mutual Fund Schemes. 14.41% of the Bank’s Equity is held by Mutual Funds present across 395 schemes, most of them holding it to the max permissible limits.

Fundamentally HDFC Bank is one of the biggest contributor to stock market wealth creation in the last 2 decades. Along with its parent, HDFC, which was having a 500 Crores market cap when it was listed in the early 90’s, current value of both these companies along with their subsidiaries have crossed 13 plus lakh crores.

HDFC Bank had been growing at 30% per annum for a very long period, in the recent past for a couple of years its growth has tapered to below 20s. Even the September quarter results is expected to hold the 18 to 20% growth range.

On the technical side, HDFC Bank’s chart seems to be getting close to bearish divergences, which is an indication that it is getting saturated at the top. Post the results, if the price moves are not pretty strong, it will give way to the bears.

Two possible outcomes is likely in this stock.

  1. It succumbs to bear power and goes down, which will become a very good opportunity for long term investors to add this stock to their legacy holdings or
  2. Lose momentum, will hold to the current range to build strength for the next rally.

In the present condition, later is most likely to happen. Though the stock might not see a steep fall, as it has formed a range of 1050-1250 on its prices, this range should hold and then have an up side breakout. When this consolidation plays out, all of the mutual fund schemes that hold this stock will go through the same pattern of consolidation because of the large exposure this stock has in all the portfolios. Today 14.41% of the Bank’s Equity is held by mutual funds, which is present across 395 mutual fund schemes.

Like HDFC Bank we have many such Giant Large Cap stocks which are having similar patterns both on their profit numbers and technical patterns. This raises concern on the near future performance of funds holding exposure into these stocks. This also coincides with the thought of non-participation of large cap in the correction. Now with the developments that are expected, we will see good amount participation, which will mean that we have to brace for another bout of weakness for our markets.

Since it is the big businesses of our country that will go through this change of correcting themselves, it might not be a big drop in values.

After the mid and small cap value correction, now it is time for the big stocks to correct. Since the last 2 years, we have had investors complaining about non-performance of their portfolios where very few of them still had some positive growth in their investments. This was due to the over stretching of the Giant Large Caps in our country. Thanks to the current developments, soon this non-correlation will come to an end.

All of these developments are bringing new opportunities too, since the large cap space is going to correct now. It will be good to take exit from your existing investments, move the funds to liquid and have the same get back into the same large cap scheme in a staggered manner through STP. This will help you book available profits, not take the hit when NAV drops and also get in with an average NAV to participate in the next rally.

Those of you who have exposure to schemes which are in the large cap space, which has completed their exist load period. Mainly having stocks that are likely to turn negative can take this unique opportunity to add more returns to your investments.

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