Home / Markets / Mark To Market /  HDFC AMC’s investors get a rude awakening during the pandemic

Equity mutual fund investors, who had a harrowing time in March, and debt fund investors, who were hit in a few categories in April, have by and large survived the pandemic. The broad equity market is down only about 7% from its pre-covid highs and falling yields have helped returns of debt funds.

However, for investors in the largest listed mutual fund (MF) company, HDFC Asset Management Co. Ltd (AM, the pandemic has been a rude awakening. Shares of the fund house underperformed the broader market this year and could even struggle in the near future. The HDFC AMC stock has dropped 28% from its pre-covid highs, while the Nifty 50 is down just 6.5%. Shares of life insurance companies, which compete with MFs for investments, have fared much better. True, shares of peer Nippon Life India Assent Management Ltd have fallen almost 38% from its pre-covid highs, but expectations tend to be higher from HDFC AMC.

One worry is the erosion in market share in the lucrative equity segment. HDFC AMC’s market share in equity assets under management (AUM) has slipped from about 15.7% in April 2019 to about 14% in July 2020. As equity products have a higher yield, any reduction has a larger proportionate impact on profitability. In the June quarter, HDFC AMC’s yields reflected the sluggish equity segment AUM growth, as operating revenue yields declined 10 basis points year-on-year in Q1.

Drawing down
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Drawing down

Of late, investors are shying away from certain equity categories such as small- and mid-cap, where yields tend to be high. There was a net outflow of 2,480 crore in July from equity funds across the industry.

Besides, the sluggish performance of equity funds in general in the past few years has left some mutual fund investors disillusioned, according to analysts.

Even in the debt segment, there have been periodic mishaps, with Franklin Templeton’s decision to abruptly shut down six of its schemes being the latest.

“Earlier, people were extrapolating the high flows into the future. However, that is not playing out as investors are generally disillusioned with MF returns," said an analyst tracking financial services companies, on the condition of anonymity.

The drop in systematic investment plan (SIP) inflows is also a worry. HDFC AMC’s monthly SIP flows declined 15% in the June quarter. Industry SIP inflows dropped at a much slower pace of 8%, though there may be differences in how these numbers are collated.

As of now, HDFC AMC is trying to mend the loss in market share and has hired new fund managers.

Even so, as inflows are likely to remain sluggish for now, HDFC AMC’s stock investors may have to wait for a long timeto see recovery. The stock is quoting at a price-earnings multiple of 41 times trailing earnings, which is not comforting.

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