'A price fall doesn't...': Kotak's Nilesh Shah explains IndusInd Bank drop impact on mutual funds

Amid reports of massive mutual fund losses due to the sharp fall in IndusInd Bank stock, Kotak Mutual Fund MD Nilesh Shah has clarified that many analyses fail to differentiate between arbitrage, passive, and active positions when assessing fund losses.

Taking to X, Shah wrote, “Many articles have talked about losses suffered by mutual funds in IndusInd Bank sharp fall in recent times. Most have failed to differentiate between arbitrage, passive, and active positions.”

Shah explained that in arbitrage positions, commonly found in arbitrage funds, balanced advantage funds, asset allocation funds, and equity saving schemes, the fund holds a long cash position while shorting stock futures. This means that a price fall doesn't impact the fund return, as losses on the cash position are offset by gains on the stock futures position, he said.

For passive funds, Shah pointed out that while returns are impacted by price drops, fund managers have no discretion in holding or selling stocks since they must replicate the benchmark index. He stressed that not replicating the index could result in regulatory breaches and penalties. “A fund house should be evaluated on their active position in relation to the benchmark index. Sadly, most miss that part,” he added.

IndusInd Bank shares plunged last week after the bank, in an internal review of its derivative portfolio, found discrepancies that could reduce its net worth by an estimated 2.35%. This amounts to an impact of nearly Rs 1,577 crore.

Mutual funds reportedly offloaded around 1.6 crore shares of IndusInd Bank in February, reducing their total holdings from 22.3 crore shares in January to 20.7 crore in February. During this period, Kotak Mutual Fund sold shares worth ₹509 crore, Tata Mutual Fund offloaded ₹126 crore worth of shares, and PPFAS Mutual Fund exited ₹29 crore worth of holdings. Meanwhile, Bandhan Mutual Fund retained 93.47 lakh shares worth ₹900 crore, making it one of the top 10 holdings in its portfolio. Despite the outflows, Quant Mutual Fund added 30.77 lakh shares worth ₹300 crore in February, showing confidence in the stock.

Following IndusInd Bank’s stock plunge, the collective value of mutual fund holdings in the bank dropped from ₹20,670 crore to ₹13,700 crore, resulting in a staggering loss of ₹6,970 crore. Among the biggest exposures, ICICI Prudential Mutual Fund held shares worth ₹3,778 crore (3.81 crore shares), while SBI Mutual Fund had ₹3,047 crore worth of holdings (3.07 crore shares). HDFC Mutual Fund and UTI Mutual Fund also had exposure exceeding ₹2,000 crore each.