Equity mutual funds continue to face concentration risk

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The lack of depth in the stock market and tough regulations have forced mutual funds to bet on top market cap companies.

The top 10 market cap companies have attracted 36 per cent, or ₹4.28 lakh crore, of the overall equity asset under management of mutual funds of ₹11.83 lakh crore as of September-end and the trend has remained more or less the same in subsequent months.

In fact, the concentration of mutual fund investment in equity market has been a bane on the industry for the last few years. In June 2018, MFs had invested ₹9.07 lakh crore in equities and of this 68 per cent, or ₹6.21 lakh crore, was parked in large-cap stocks, which are the top 100 market cap stocks. While about 18 per cent was in mid-cap and 13 per cent was in small-cap stocks.

Equity investment of mutual fund in top five market cap companies accounted for 27 per cent, or ₹3.17 lakh crore, in September.

Equity asset under management includes pure-play equity schemes, equity-linked saving schemes, 50 per cent of balanced and hybrid funds, exchange -traded fund and fund of fund.

On a pure-play equity fund AUM of ₹7.64 lakh crore, the concentration of investment in top five market cap companies is even more scary at 41 per cent, or ₹3.13 lakh crore.

The country’s largest company in terms of market cap, Reliance Industries, has received equity mutual funds investment of ₹77,400 crore while HDFC Bank and Infosys have ₹82,900 crore and ₹61,100 crore of investormoney riding on them.

Limited options

Sorbh Gupta, Associate Fund Manager, Quantum AMC, said mutual funds are forced to chase the top market cap companies as they have to deliver more returns than the benchmark index which themselves are narrow.

The most popular benchmark equity indices, the Sensex and the Nifty, have just 30 and 50 stocks, respectively, while in the US, the most followed Nasdaq and S&P indices are made of 100 and 500 stocks, he added.

In fact, he added even today Quantum has no exposure to Reliance Industries due to its ESG (environment, social and governance) score. Mirae Asset Management Company recently capped investment in its Emerging Bluechip Fund to ₹2,500 from ₹25,000 a month through systematic investment plan.

It has already stopped lump sum investment in the fund which invests in both large- and mid-cap stocks.

Though mutual funds do not say in so many words, they are very few investment opportunities to match the risk-return need of investors, said CEO of a mutual fund.

Dr Nirakar Pradhan, Chief Executive Officer, PRMIA India, said since fund managers follow certain index as benchmark, they invest in the same proportion as the index composition due to the risk of under-performance.

Sayalee Khandke, Manager Research, Investica, said the majority of MF managers preferred to stay invested in large-caps due to uncertainty on the US elections. They will now diversify across market capitalisation with outcome of US elections getting clearer, she said.