Why is HDFC bank the most preferred choice for equity diversified schemes?

Mutual fund AUM hits historic high

The mutual fund industry's assets under management (AUM) reached a record high of Rs 61.16 lakh crore, marking a significant milestone in its growth trajectory. This surge underscores robust investor participation and confidence in mutual funds. Systematic investment plans (SIPs) also witnessed a peak contribution of Rs 21,262 crore in June, up from Rs 20,904 crore in May and Rs 20,371.47 crore in April.

Strategic Portfolio Adjustments

Mutual funds continuously fine-tune their portfolios by adding or removing specific stocks to maximize returns for investors. According to the Mutual Fund Insights report by Nuvama Alternative & Quantitative Research, mutual funds invested Rs 282 billion in stocks on the Indian secondary market in June 2024.

According to the report, mutual fund houses in the large-cap segment made significant investments in stocks of companies such as Reliance Industries, HDFC Bank, Infosys, Life Insurance Corporation, and Hindustan Unilever.

As per an analysis by YES Securities, these are the top 10 stocks where MFs reportedly bought and sold their holdings:

Top 10 stocks that MF houses bought

HDFC Bank

Indus Tower

BPCL

Mphasis

HindPetro

Infosys

Reliance Industries

HDFC Life

Motilal OFS

Top 10 stocks that MG houses sold

Hindustan Aeronautics Limited

Bharat Electronics

Bharti Airtel

State Bank of India

Power Finance Corporation Ltd

ICICI Bank

REC Limited

Sun Pharmaceutical Industries

ABB

Bharat Dynamics Ltd

HDFC Bank: A consensus pick

HDFC Bank has emerged as one of the top holdings. Several factors contribute to its popularity among equity diversified portfolios:

Consistent Performance and Analyst Endorsements

• Reliable Earnings: HDFC Bank has a track record of delivering consistent earnings over two decades, making it a reliable choice for fund managers. Its consistent performance minimizes the risk of underperformance.
  

Market Uncertainty and Safe Stock Status

• Safe Stock: HDFC Bank is considered a safe stock, especially during periods of market uncertainty influenced by global and local factors. Fund managers prefer safe, high-quality stocks to navigate volatile markets.
  
• Comparative Advantage: With other banks like PSU banks, Axis Bank, and ICICI Bank, HDFC Bank emerges as a more stable and less risky option.

Active management and portfolio diversification

• Alpha generation: While heavy reliance on a single stock might seem like lazy investing, fund managers argue that being close to the index on one security doesn’t solely drive alpha. Other stocks in the portfolio contribute to outperformance.
  
• Portfolio analysis: For individual client portfolios, managing single-stock exposure to avoid over-allocation is crucial. This is typically handled by replacing overlapping stocks with other quality schemes.
• ETF alternatives: In categories where active management shows high portfolio correlation, exchange-traded funds (ETFs) might be a better option. However, fund managers often prefer the safety in consensus holdings to avoid being questioned for underperformance.

Long-term strategy and discipline

• Consistency and discipline: A disciplined buy-and-hold strategy focused on consistent stock selection can outperform jumping into short-term opportunities. Index funds benefit from this disciplined approach as their composition changes infrequently.
  
• Fund Manager's Role: The role of fund managers and advisors is to ensure differentiation among schemes. Maintaining a disciplined strategy and selecting stocks judiciously can lead to better long-term returns.

Investor considerations

• Risk-Adjusted Returns: For investors, it’s crucial to consider the overall risk-adjusted returns of a scheme rather than individual stock holdings.
  
• Performance Reflection: If a fund manager fails to differentiate their portfolio reasonably, it will eventually reflect in the fund’s performance, potentially leading to underperformance and loss of favor among investors.

HDFC Bank's strong performance record, significant index weightage, and market perception as a safe stock make it a popular choice among equity diversified schemes. While heavy reliance on a single stock might raise questions about active management, disciplined and strategic stock selection can still drive alpha and deliver superior returns to investors.

Disclaimer: The above information provided is for informational purposes only. Please consult a professional expert before making any investment decisions.