Country’s second largest public sector lender, Punjab National Bank ( PNB ), is now in the middle of a ₹ 11,400 crore case of fraud transaction. On the morning of 14th February 2018 , PNB stunned the country’s financial sector when it informed the Bombay Stock Exchange ( BSE ) that it has detected some unauthorised and fraud transactions worth $ 1.77 billion (about ₹ 11,400 crore) at one of its Mumbai branches.
On 29th of January 2018, a PNB official from Mumbai filed a criminal complaint with India’s federal investigative agency against three companies and four people, including Mr. Nirav Modi, a high-end jeweller and Mr. Mehul Choksi, the managing director of Gitanjali Gems Ltd, saying they had defrauded the bank and caused a loss of ₹ 280 crore.
The bank alleged that two bank officials, Gokulnath Shetty (now retired) and Manoj Kharatat, at one of the Mumbai branch had helped the companies and people managing them get Letters of Undertaking ( LoUs ) from it without having a sanctioned credit limit or maintaining funds on margin. The LoUs were used to obtain short-term credit from overseas branches of other Indian banks, PNB said.
Effect of PNB scam on Mutual Funds
There are different 3 major types of mutual funds in India :
Punjab National Bank, incorporated in the year 1969, is the second largest public sector banking company having a market cap of ₹ 30477.50 Crore.
Following the announcement of scam, PNB shares crashed 10 % intraday on 14th February eroding close to ₹ 4,000 crore investor money considering the magnitude of the scam which is nearly 1/3rd the market capitalization of PNB. The falling prices of the shares will directly impact the mutual fund schemes that are holding shares of PNB.
A lot of mutual fund houses invested in PNB. So, the mutual fund schemes offered by these fund houses especially equity oriented mutual fund hit due to PNB fraud case. PNB, whose share price has fallen 21 per cent in the last couple of days, is part of the equity portfolios of 117 mutual fund schemes. According to value research, these equity oriented mutual fund schemes together hold PNB shares worth ₹ 3,980 crore.
However, the PNB stock accounts for only 2-4 percent of the fund portfolio for couple of mutual fund schemes. Moreover, out of the 117 mutual fund schemes that invested in PNB only two banking Exchange-traded funds ( ETFs ) have allocated over 9% of their AUM in the stock. They have no choice over it as ETFs are mandated to invest in the constituent shares of their underlying benchmark in the same proportion.
So, investors need not worry as the stock has a small weightage in portfolio of individual mutual schemes,
Also, The PNB fraud case has caught fund managers off guard. Now they will take corrective action of their fund portfolio accordingly. Fund Managers of different mutual fund schemes must have worked on the strategies to deal with the chaos as the scam unfolded.
Holding of PNB stocks in various Mutual fund schemes
Here is the list of top 10 most effected mutual fund schemes that are effected by PNB fraud case.
|Mutual Fund Scheme||% Holdings||Market Value (in Rs crore)|
|Kotak PSU Bank ETF||9.97||12.58|
|Reliance ETF PSU Bank BeES||9.97||13.36|
|LIC MF Banking & Financial Services Fund||7.54||6.22|
|LIC MF Equity Fund||5.53||20.95|
|SBI PSU Fund||4.49||10.11|
|Taurus Banking & Financial Services Fund||3.69||0.24|
|HDFC Infrastructure Fund||3.54||48.47|
|Reliance Tax Saver (ELSS) Fund||2.42||262|
|HDFC Equity Fund||1.78||409|
Some popular schemes of HDFC Mutual Fund held shares worth ₹ 1,800 crore as on January 31, 2018 which account for 1-2 per cent of the portfolio for individual schemes. HDFC Mutual Fund holds the highest, 4.48 % stake in the scam hit PNB as of January 31, 2018.
Data on BSE shows that out of around 243 crore outstanding shares of Punjab National Bank, HDFC Mutual Fund holds 10.8 crore shares. Top five HDFC mutual Fund schemes which holds PNB stocks are :
What should mutual fund investors do ?
Not many mutual fund schemes have significant investments in PNB. Only two banking Exchange-traded funds ( ETFs ) have over 9 per cent of their AUM in the stock. However, ETFs don’t have much of a choice in stocks as they are mandated to buy the constituent shares in the index in the same proportion.
ETF is kind of an index fund that invest in an index, a commodity, currencies, bonds etc. ETF is an excellent investment instrument for achieving investor’s goals, provided used wisely.
The mutual schemes might get affected by the sentimental stir in the market but will not degrade the performances by more than 1% – 2%. The long-term goals of the funds are expected to remain intact as the fund manager may take a call to rebalance the portfolios of the Mutual Funds.
So, Investors who are invested in mutual fund schemes must not worry as the fund manager must have worked on the strategy to deal with the mess after the scam unfolded. Mutual Fund investors at this juncture should trust their fund managers.
What should a retail investor who invest directly in stocks do?
For protection or to stay away from such bad news the retail investors should ideally stay away from directly investing in stocks. They should rather invest in mutual funds for equity investments since the fund manager will take all the investing calls and risks are highly distributed among companies of different capitalization, sectors and investment instrument types.
But if invest directly in stock market, you should decide on whether to get out or stay put on your investment. Consider these options to make decision :
- If you are not too sure about how deep in trouble the company is in, it is always better to get out, even if it is at a loss.
- See if the current valuation of the stock reflects the size of the loss. If the valuations seems fine, then you can stay invested or even buy at lower prices. But if the two don’t match, then it is better to sell the stocks.
- If it is backed my strong fundamentals and is led by a management that can make the company bounce back or if a strong management takes over, then one should stay invested.
Investing in Mutual funds is any day a better option then investing in stocks directly. Reason being :
- Investing in stocks are much riskier than investing in mutual funds. Also, mutual funds may give you return as comparable to stocks if you have high risk appetite.
- Intensive research on companies along with overall industry and market sentiment is require for investing in stocks. Fund house with professional fund manager do all research for mutual funds like picking right stocks, tracking them and keep you updated with current market scenario.
- It requires well amount of cash to diversify your portfolio of stocks. Mutual fund by default have diversified portfolio by investing in collection of stocks and /or bonds, thereby reducing overall risk on investment.
- Investing in stocks require a lot of time in deciding on which shares to buy where as it takes lesser time to learn about each mutual fund.
To look at some of the best performing funds from every category, check out Groww 30 best mutual funds to invest in 2018.
Happy investing !
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.