Top 10 Mutual Funds Holding IndusInd Bank May Take a Hit. Do You Own These?

Institutional investors, regulators, and analysts are keenly watching such events because they have the potential to destabilize investment decision-making and sentiment in the market. When a solidly performing bank has an internal crisis, the implications can be serious, affecting retail and institutional investors equally.

The market is buzzing with latest news, where IndusInd Bank, a leading private sector bank in India, had an accounting anomaly that sent alarm bells ringing for investors. This news has led to a drastic fall in the bank's share prices, which has sent the market into panic.

About IndusInd Bank Ltd.

IndusInd Bank is a large private-sector Indian bank with significant retail and corporate banking presence. Founded in 1994, the bank has gradually increased its presence in every nook and corner of India, serving individuals and institutions as customers.

Having a diversified portfolio that comprises retail loans, credit cards, corporate lending, and forex services, IndusInd Bank has been identified as an institution with innovative banking solutions. For years, the bank has had a reputation of strong financial performance and stable growth, and today it is one of the important players in the Indian banking market.

In early 2024, IndusInd Bank presented robust quarterly numbers, citing enhanced retail loan growth and stronger digital banking efforts. The bank also initiated strategic collaborations to further deepen its penetration of rural credit markets, as part of India's increasing need for accessible financial services.

IndusInd Bank Ltd. Under Scrutiny

Although there was a steady growth trajectory, IndusInd Bank recently suffered a major blow that shook investor confidence. The bank reported an accounting mismatch related to forex hedging expenses, which caused financial inaccuracies. This announcement led to a sharp drop in its share price, with the shares tumbling over fears of governance and financial stability.

Market analysts feared that the mistake could affect the bank's earnings transparency, credibility, and business operations transparency. The event has put IndusInd Bank in the limelight, compelling stakeholders to evaluate the long-term consequences of this event.

What Led to IndusInd Bank's Sudden Slump?

• Discrepancies in Net Worth Attributable to the Derivatives Portfolio

  IndusInd Bank reportedly miscalculated certain forex hedging costs. During an internal review, the bank identified inconsistencies in the way some hedging costs were accounted for in previous quarters. This error impacted the bank's net worth, with a reported decline. This unexpected news alarmed market participants, leading to a drop in stock prices and suggesting potential gaps in the bank's internal control mechanisms.

• Overstatement of Net Interest Margin (NIM)

  Yet another important reason for the correction of the stock was IndusInd Bank's inflated Net Interest Margin (NIM), an essential profitability ratio. The inflated NIM had the investors believing the bank was more profitable and efficient than it actually was. Once the mismatch emerged, earnings quality and health worries increased, triggering a sell-off.

• Increasing Stress in Microfinance Lending

  IndusInd Bank's exposure to microfinance institutions (MFIs) has been a cause of concern because of increasing delinquencies in the industry. This increased credit risk along with concerns of rising NPAs and the unpredictability of provisioning requirements has added pressure to the financial stability of the bank and fueled its shares' downward movement.

• Leadership Uncertainty: CEO's Shorter Tenure Extension

  IndusInd Bank leadership transitions have increased investor fears. The CEO's less-than-projected tenure extension has fueled rumours of leadership stability and succession planning, creating uncertainty regarding the bank's strategic direction.

• Chief Financial Officer (CFO) resignation

  IndusInd Bank's CFO recently stepped down amidst persistent financial irregularities and governance issues, further fueling the volatility. Such high-profile exits at times of crisis tend to evoke apprehensions of internal strife or unfinished business, adding to investor negative sentiment.

  These events not only led the stock of IndusInd Bank to crash but also generated concerns regarding mutual funds having heavy exposure to the stock.

  [Read: How to Invest in Equity Mutual Funds During a Stock Market Crash]

  Consequently, fund houses with significant investments in IndusInd Bank are likely to suffer a significant hit. The below graph of reputed fund houses displays their exposure towards IndusInd Bank, including the number of schemes that are invested in the stock.

ICICI Prudential Mutual Fund leads the list with the highest exposure, holding approximately Rs 3,779 crore across 36 schemes. This is followed closely by HDFC Mutual Fund, with holdings worth Rs 3,564 crore spread across 29 schemes. SBI Mutual Fund ranks third, holding Rs 3,048 crore across 16 schemes, indicating a relatively concentrated exposure compared to ICICI Pru and HDFC MF.

Other prominent fund houses with notable exposure include UTI Mutual Fund (Rs 2,447 crore across 27 schemes) and Nippon India Mutual Fund (Rs 2,122 crore across 23 schemes). Fund houses such as Bandhan, Franklin Templeton, Aditya Birla SL, and Kotak Mutual Fund hold comparatively lower exposure, each with values under Rs 1,000 crore. Despite having fewer schemes, some of these fund houses maintain substantial investment values, indicating concentrated bets on IndusInd Bank within selected funds.

For investors, this highlights the potential risk for those invested in funds with higher exposure to IndusInd Bank, especially after the recent correction in the bank's stock price. While diversified portfolios may absorb some of this volatility, investors should monitor their fund holdings closely and assess how these exposures align with their investment strategy.

Among these, Mahindra Manulife Arbitrage Fund holds the highest allocation at 6.94%, reflecting a notable commitment to the stock. Following closely, Quant ESG Equity Fund and Quant Focused Fund have allocations of 6.31% and 5.15%, respectively. These higher allocations indicate the fund managers' confidence in IndusInd Bank's potential prior to the recent news.

Funds like ICICI Pru Banking & Financial Services Fund and Sundaram Focused Fund also have considerable exposure, aligning with their thematic focus on banking and financial services. Similarly, sector-specific funds such as Sundaram Financial Services Opportunities Fund reflect a targeted approach toward the banking sector. Notably, diversified funds like Quant Value Fund and ICICI Pru India Opportunities Fund maintain moderate allocations, spreading risk across multiple sectors.

However, investors holding these mutual funds should closely monitor IndusInd Bank's performance, given its recent challenges. While the exposure levels vary, these allocations may influence the funds' short-term NAV fluctuations. Evaluating the fund manager's strategy and portfolio diversification is crucial in deciding whether to stay invested or rebalance holdings.

Should You Be Concerned As an Investor?

If you are invested in the above listed mutual funds or any other holding IndusInd Bank Ltd., it's important to assess the broader picture rather than act on panic. Here are key points to consider:

1. Diversification

Despite IndusInd Bank's setback, most mutual funds listed above maintain diversified portfolios. A well-diversified fund can absorb short-term volatility from a single stock without severely impacting returns, so there is no need to panic-sell based on market buzz.

2. Fund Manager's Strategy

Understand your fund manager's investment strategy. Value funds may retain IndusInd Bank as part of a recovery strategy, while growth-focused funds may reduce exposure to minimise volatility.

3. Investment Horizon

Investors with a long-term horizon may see IndusInd Bank's correction as an opportunity for future recovery. Short-term investors should assess their risk appetite and review their portfolio allocation.

4. Sector Outlook:

IndusInd Bank's recent missteps aside, the Indian banking sector remains poised for long-term growth. If macroeconomic fundamentals remain stable, banks may recover steadily going forward.

Steps to Consider:

• Check the latest portfolio disclosure to understand the extent of exposure.

• Monitor how significantly IndusInd Bank's decline has impacted your mutual fund's NAV.

• If you are unsure about your investment strategy, seek professional guidance to determine whether adjustments are needed.

• Reducing concentrated exposure to individual stocks or sectors can mitigate risk in volatile market conditions.

To Conclude...

IndusInd Bank's stock correction has undoubtedly impacted several prominent mutual funds. However, for disciplined investors following a long-term strategy, this setback may present a potential recovery opportunity.

By carefully evaluating fund performance, diversification, and investment objectives, investors can make informed decisions to navigate the current volatility effectively. Ultimately, understanding how each fund manager responds to IndusInd Bank's challenges will be crucial in assessing future growth prospects.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.