Its been a month since the Adani-Hindenburg saga unfolded. Ever since the Hindenburg report was published, all of the listed Adani group stocks have dipped majorly. The flagship company, Adani Enterprises saw its stock price decline by 61.3%, while other stocks too have been witnessing high volatility. As per media reports, these stocks have lost over Rs 12 lakh crore in the combined market cap, which currently stands at around 7.15 lakh crore.

For the unversed, US-based Hindenburg Research, last month, had raised serious allegations of stock manipulation and accounting fraud against the Adani Group companies. The firm has also accused Adani Group companies of improper extensive use of entities set up in offshore tax havens and has expressed concern about high debt levels. Furthermore, Hindenburg said that seven Adani listed companies have an 85% downside on a fundamental basis.

[Read: Caught in a Storm: Are Your Mutual Funds Holding Adani Group Stocks?]

Adani stock prices have dipped majorly

Stock name 1 month returns
Adani Enterprises -61.30%
Adani Ports & SEZ -21.50%
Adani Wilmar -32.70%
Adani Total Gas -79.50%
Adani Green Energy -73.80%
Adani Transmission -71.70%
ACC -20.30%
Ambuja Cement -25.10%

Data as of February 24, 2023

Mutual Fund schemes that held significant exposure to Adani group stocks have witnessed a decline in NAV of up to 9% in the last one month.

The Adani group is trying to gain investors’ confidence by pre-paying some of its loan backed by pledged shares. The group had previously withdrawn Rs 20,000 crore FPO of Adani Enterprises amid a meltdown in its stocks. It has also reportedly scraped a Rs 70.2 billion coal plant purchase to rein in spending and boost investor confidence.

Regardless, the group stock prices continue to bleed as there are still clouds over whether the allegations are true. Given the serious nature of the allegations, investors are seeking thorough investigation and potential punishment.

Do mutual funds still hold Adani stocks?

As mentioned in the previous article, most actively managed equity mutual funds avoided investing in Adani group stocks due to expensive valuation and high debt levels.

For certain mutual fund schemes that did hold Adani group stocks, the combined holding has come down to 29,900,658 shares as of January 31, 2023, compared to 45,065,045 shares as of December 31, 2022.

Despite the rout in Adani stock prices, some mutual fund schemes that previously held high exposure to these stocks as of December 31, 2022, continued to hold them at the end of January 2023 as well.

While the percentage holding has come down, it can be attributed to the fall in share prices. The number of shares held by most of these schemes remained unchanged in January compared to the previous month.

Actively managed schemes that hold high exposure to Adani stocks

Scheme Name Stock Dec-22 Jan-23
Holding No. of shares Holding No. of shares
SBI Magnum Comma Fund Ambuja Cements Ltd. 8.82% 7,50,000 3.87% 4,25,000
Quant Infrastructure Fund Ambuja Cements Ltd. 8.27% 13,46,496 6.43% 13,46,496
Quant Large Cap Fund Adani Ports and Special Economic Zone Ltd. 7.96% 2,56,800 6.23% 2,56,800
Quant Infrastructure Fund Adani Ports and Special Economic Zone Ltd. 7.81% 8,15,300 5.95% 8,15,300
Quant Tax Plan Ambuja Cements Ltd. 7.72% 36,92,214 5.50% 36,92,214
HDFC Housing Opp Fund Ambuja Cements Ltd. 7.52% 17,14,176 6.21% 17,49,419
ICICI Pru Commodities Fund Ambuja Cements Ltd. 7.22% 10,58,369 5.31% 10,00,000
Quant ESG Equity Fund Adani Ports and Special Economic Zone Ltd. 7.04% 1,36,600
UTI Transportation & Logistics Fund Adani Ports and Special Economic Zone Ltd. 7.00% 16,52,915 5.11% 16,52,915
Quant Flexi Cap Fund Adani Ports and Special Economic Zone Ltd. 6.96% 7,82,590 4.84% 7,82,590
Quant Active Fund Ambuja Cements Ltd. 6.77% 45,76,000 5.16% 45,76,000
Quant Focused Fund Adani Ports and Special Economic Zone Ltd. 6.45% 1,55,100 4.53% 1,55,100
Tata Resources & Energy Fund Ambuja Cements Ltd. 6.42% 3,15,000 5.28% 3,15,000
Taurus Largecap Equity Fund Adani Enterprises Ltd. 6.12% 5,377 4.96% 5,377
Quant Tax Plan Adani Ports and Special Economic Zone Ltd. 6.11% 18,71,400 4.26% 18,71,400
Motilal Oswal Flexi Cap Fund Ambuja Cements Ltd. 5.88% 99,91,200 4.78% 99,91,200
Tata Housing Opportunities Fund Ambuja Cements Ltd. 5.70% 4,06,600 4.48% 4,06,600
SBI Magnum Comma Fund ACC Ltd. 5.48% 1,00,000 2.79% 62,500
Taurus Ethical Fund Ambuja Cements Ltd. 5.46% 89,000
Taurus Largecap Equity Fund Adani Ports and Special Economic Zone Ltd. 5.40% 22,403 4.83% 25,403
Quant Large & Mid Cap Fund Adani Ports and Special Economic Zone Ltd. 5.27% 3,53,260 3.55% 3,53,260

# Includes actively managed schemes with over 5% allocation in Adani Group stocks as of December 31, 2022.
Data as of January 31, 2023
(Source: ACE MF)  

Quant Mutual Fund continued to hold relatively higher exposure among mutual fund houses, having invested in Adani Enterprises and Adani Ports & SEZ. However, a favourable early entry point in these shares and the subsequent sharp run-up in prices helped it stem some of the losses. Quant ESG Fund and Quant Quantamental Fund are the only schemes where the fund house has exited its position.

Notably, Quant Mutual Fund follows a factor-based investment approach that lays high emphasis on momentum-based growth. Now that Adani stocks are losing momentum, the fund house will likely trim/exit their exposure in them in the coming months.

Meanwhile, equity mutual funds, taking advantage of the price corrections, lapped up certain Adani stocks, such as ACC and Ambuja Cements. These two are fundamentally strong companies and none of their shares are pledged by the promoters (Adani). Adani has recently acquired these two companies as a part of its expansion plans.

Apart from these, actively managed equity mutual funds had little or no exposure to Adani Green, Adani Transmissions, and Adani Total Gas. In terms of hybrid funds, Arbitrage Funds had the highest exposure to Adani stocks. However, as these funds invest in hedged securities, the risk is low.

Passive Funds such as ETFs, Index Funds, and Smart Beta Funds saw a minor increase in their holdings in Adani stocks. The exposure was seen mainly in schemes tracking the Nifty Next 50 index and Nifty 200 Momentum 30 index. Consumption and Infrastructure themed ETFs also saw increased exposure to certain Adani stocks.

To sum up

Mutual fund schemes holding high exposure to Adani stocks is a cause for concern. That said, the risk can be mitigated as actively managed mutual funds hold a diversified portfolio of stocks – a fall in price of one stock is offset by a potential rise in another stock. Furthermore, no diversified equity mutual fund can hold allocation of more than 10% in a particular stock to avoid concentration risk.

[Read:  Looking to Generate Alpha Over the Long-term? Here’s Why Active Funds May Still Be a Better Option Than Index Funds]

You should consider selling your mutual fund units only in the following scenarios:

  • Your scheme is consistently underperforming the benchmark and most of its peers

  • Your investment has grown to the desired corpus

  • To gradually shift to safer avenues when your financial goal is approaching

  • During portfolio rebalancing to maintain the desired asset allocation

  • The fund objective changes and is no longer in congruence with your own objective

  • The fund risk profile changes and doesn't match your current risk appetite

  • In case of a financial emergency when you have no other option

  • You wish to adopt a change in investment style (value, growth, blend, aggressive, conservative, etc.)

You may even consider exiting the scheme if you are not comfortable with your mutual fund scheme holding exposure to Adani Group companies, as the Hindenburg report has raised a direct question on its governance and accounting practice. Moreover, it is important that you hold about 5-7 quality schemes in your portfolio, depending on the size of your investment portfolio to enable optimal diversification across investment styles/strategies.

At PersonalFN, we have always encouraged investors to focus on creating a diversified portfolio of best mutual funds based on their financial goals, risk profile, and investment horizon.

Actively managed schemes have the flexibility to add or remove a particular stock/sector depending on the outlook. Moreover, actively managed schemes restrict top allocation in individual stocks to 10% to avoid concentration risk.

Meanwhile, passive funds simply mirror the composition of a particular index. Thus, during polarised market rallies wherein a handful of stocks have been driving the index, passive funds have generated better returns than actively managed funds. However, like actively managed funds, passive funds too are susceptible to market volatility and can witness a higher downside if any of the top-holding comes under pressure.

As an investor, you can suitably invest in active funds, passive funds, or a combination of both with a suitable allocation, and invest with a long-term view to sail through the short-term market volatility.

This article first appeared on PersonalFN here

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